[]Quantitative & Critical thinking Assignment FIN 341 Prof: Maria E. de Boyrie     Assignment due date: Please refer to syllabus   Instructions: ·         This assignment is worth…

Quantitative & Critical thinking Assignment

FIN 341

Prof: Maria E. de Boyrie

Assignment due date: Please refer to syllabus

Instructions:

·         This assignment is worth 5% of your final grade for the class.

·         This work is to be done individually.  Working with others is not allowed and doing so will constitute cheating.  All answers must be your own.  I will check for plagiarism and copying from others.  If caught plagiarizing or copying you will receive a 0 in the assignment.  Please refer to information above for more information.

·         Provide answers to all questions in a Word document.  Make sure to turn the assignment in electronic form. 

·         You can submit the quantitative part of the assignment in an excel document.

·         No late work will be considered.  The deadline can be found in the main body of the syllabus. 

·         Make sure all questions are answered fully. 

·         Please see matrixes (in Canvas) describing how this assignment will be graded when it comes to grammar and critical thinking. 

·         Make sure you answer each question fully and in great detail. 

Instructions on how to type equations/formulas in a word document:

·         Open the Word document

·         On the ribbon click on Insert

·         In the Symbols box click on Equation.  A light blue box will appear.

·         You can choose what you wish to do under design.

§  To include a fraction click on fraction first and then type what you wish in the appropriate boxes.

§  To include a power first click on script and select the one for power.  You may now add the numbers or symbols.

Problem:

You have just completed your undergraduate degree, and one of your favorite courses was “Today’s Entrepreneurs.” In fact, you enjoyed it so much you have decided you want to “be your own boss.” While you were in the program, your grandfather died and left you $300,000 to do with as you please. You are not an inventor, and you do not have a trade skill that you can market; however, you have decided that you would like to purchase at least one established franchise in the fast foods area, maybe two (if profitable). The problem is that you have never been one to stay with any project for too long, so you figure that your time frame is three years. After three years you will sell off your investment and go on to something else.  You have narrowed your selection down to two choices; (1) Franchise L: Lisa’s Soups, Salads, & Stuff and (2) Franchise S: Sam’s Fabulous Fried Chicken.  The net cash flows shown below include the price you would receive for selling the franchise in Year 3 and the forecast of how each franchise will do over the three-year period. 

Franchise L’s cash flows will start off slowly but will increase rather quickly as people become more health conscious, while Franchise S’s cash flows will start off high but will trail off as other chicken competitors enter the marketplace and as people become more health conscious and avoid fried foods.  Franchise L serves breakfast and lunch, while Franchise S serves only dinner, so it is possible for you to invest in both franchises.  You see these franchises as perfect complements to one another: you could attract both the lunch and dinner crowds and the health conscious and not so health conscious crowds without the franchises’ directly competing against one another.  Here are the net cash flows (in thousands of dollars):

Depreciation, salvage values, net working capital requirements, and tax effects are all included in these cash flows.

You also have made subjective risk assessments of each franchise, and concluded that both franchises have risk characteristics that require a return of 10 percent.  You must now determine whether one or both of the projects should be accepted.

In order to do o please answer the following questions fully.  Make sure to show a time line, the formula to be used, the steps taken to solve the problem (calculator or excel) and the final numerical answer when appropriate.

Each of the following questions is worth 5 points. 

Questions:

Net Present Value (NPV)

1.     In your own words, define the term net present value (NPV). 

2.     What is each franchise’s NPV? Make sure to show the formula, steps and final answer.

3.     If the projects are independent and based on your answer which franchise would you select?  Why?

4.     Would your answer be different if the projects are mutually exclusive? Why or why not?

5.     Would the NPVs change, and therefore your answer, if the cost of capital changed? Why or why not?

Internal Rate of Return (IRR) – you may use a financial calculator or excel.  

1.     In your own words, what is the logic/idea behind the IRR method?

2.     Calculate the IRR for each project.  Make sure to show the formula, calculator or excel steps and final answer.

3.     According to IRR, which franchise should be accepted if they are independent?  Mutually exclusive? Why?

4.     Would the franchises’ IRRs change if the cost of capital changed?  Why or why not?

Modified Internal Rate of Return (MIRR)

1.     In your own words, define the term modified IRR (MIRR). 

2.     Find the MIRRs for Franchise L and S.  Make sure to show the formula, steps and final answer.

3.     What are the MIRR’s advantages and disadvantages vis-a-vis the regular IRR?  What are the MIRR’s advantages and disadvantages vis-a-vis the NPV?

Payback and Discounted Payback Period

1.     What is the rationale for the payback method?  You can define the concept using your own words.

2.     Calculate the payback period for each franchise. Make sure to show the formula, steps and final answer.

3.     Calculate the discounted payback period for each franchise. Make sure to show the formula, steps and final answer.

4.     According to the payback criterion, which franchise or franchises should be accepted if the firm’s maximum acceptable payback is 2 years, and if Franchise L and S are independent?  If they are mutually exclusive? Why?

5.     What is the difference between the regular and discounted payback periods?  Make sure to mention the advantage and disadvantage of each.

This question is worth 15 points.

Based on the results obtained and everything that you have described above, which franchise would you ultimately choose if the projects are mutually exclusive?  Explain in detail your decision and why you chose the model you did to make your final decision.