mod 6 mini case

Mod 6 Mini Case

A . To start off , Capital Budgeting is the process of planning which is utilized to determine and understand whether a company or a firm 's long term investment would be worth pursuing . Long term investments include purchasing new machinery , replacement materials , new plants , new products , and the research and development projects . In this case , the long term investments mentioned are the fast food franchises , whether it is worth pursuing two franchises or not

B . Independent and Mutually Exclusive Projects - Independent projects are those wherein the cash flows

of one project is not affected by that of another project . On the other hand , mutually exclusive projects are those whose cash flows can be adversely affected by the acceptance of the other project . Franchise L and Franchise S could be independent projects if the accept /reject decision (in the aspect of pursuing the other franchise ) doesn 't have any impact on the other franchise . They are mutually exclusive if the acceptance of one franchise may have consequences upon the decision of the other franchise . Because the two franchises would be owned by only one person , with a limited budget of a million dollars , it is possible that the two are mutually exclusive projects , as the performance of the other franchise may affect another despite the fact that they don 't directly compete with each other

C . 1 . Payback Period - The payback period in business would refer to the time frame needed in to have return of investment in to repay for the sum of the initial investment . If the cash flows are the same for the time of the whole project , then the formula would be Payback period Investment /Cash flow . But in the case of the two franchises where the benefits change over time , then the formula would be Payback period 1 (last year with a negative cash flow [absolute value of net benefits For Franchise L , the computation would be

Payback period 1 [100 /70] 2 .4 years payback period

For Franchise S , the computations would be

Payback period 1 [100 /120] 1 .8 years payback period

C . 2 . Basing on the method of the payback period , the franchise with the shorter payback is the one preferable . In this case , the franchise that should be accepted would be franchise S , as it has the shorter payback period which coincides with the acceptable payback of 2 years , if the two franchises are independent of projects . But if they are mutually exclusive , they did not qualify for the acceptable payback because they have a 2 .05 years payback period

C . 3 . A regular payback period always ignores the cash flow beyond the time it takes for the payback , as it also does not consider the time value of the money . It is used to identify the risk and liquidity of a certain project , in this case of the franchises . On the other hand discounted payback period method is similar with the regular payback method , except for...