Analysis of Financial Indicators - Essay Example

?Part A. PV=FV i)t PV=15,000 0.07 PV=$14,019 PV=FV i) t PV=15,000 0.04 PV=$14,423 B. Account A PV=6,500 0.06 PV=$6,132 Account B PV=12,600/ (1+0.06)2 PV=$11,214 C. At 7% discount rate At 5% discount rate PV = $ 175,421,661 At 3% discount rate PV = $182,858,207 The present value of the income stream is the lowest at 7% discount rate and the highest at 3% discount rate. This is because at a high discount rate the income due in the future is worth very little today and at a relatively low discount rate the income due in the future is worth relatively more. Part 2 In my opinion the Interstate Travel Centre business will be the riskiest of all the business plans as it requires an initial investment of $2.75million compare to $60,000 for R J Wagner & Associates Realty and $52,010 for Ice Dreams. Interstate Travel Centre will borrow $2.5million to start-up the business. Hence the discount-rate for this project will be considerably higher compare to other two projects as the other two businesses do not intend to borrow long-term finances and rely on only short term financing and as their project start-up costs are very low compare to Interstate Travel Centre hence their discount-rates will be lower. Ice Dreams project would be more riskier than the RJ Wagner & Associates Realty project because the Ice Dreams project is 100% being financed through a loan and they would have to make interest payments even if they do not make a profit, whereas RJ Wagner & Associates Realty project is equity financed as well as debt financed and their interest payments will be considerably lower than  Ice Dreams hence RJ Wagner & Associates Realty project will have the lowest discount rate compare to the other two projects. The owners of Interstate Travel Centre, Steven and Janet Smith do not have the relevant experience or exposure to run such a business. Steven Smith had years of experience in the automotive repair industry, but this was a totally new domain for him. On the other hand Janet Smith had twenty years of experience of budgeting and book-keeping services for small companies. Janet Smith may not be capable enough to handle and manage the finances of a considerably larger business compare to her past experience. The owners would face many hardships due to their relative inexperience in handling or being part of bigger projects. Interstate Travel Centre have mentioned in their business plan that the restaurant business will generate the third highest revenue for the business. Both the Co-owners Steven and Janet Smith have absolutely no experience of working in the restaurant industry so the lack of knowledge and skill may hamper the sales of the company as they may not know the actual requirements of the customers visiting the restaurant. Hence Interstate Travel Centre business is very risky. On the other hand the owner of the Real Estate business, Regina J. Wagner, a broker by profession has credibility in the Real Estate market as she recently published a real estate book and due to her credibility she would be able to attract customers and as she had experience of the Real Estate market she would be better able to understand the needs and wants of the customers. She would also have contacts in the market which will help her in developing the business further. The experience of the owner in the same industry compare to the owners of Interstate Travel Centre makes this venture is less risky compared to the Interstate Travel Centre business. The Ice Dreams business has the advantage of being first movers in the area as there are no businesses who sell shaved ice at a large scale and their indirect competitors like Snow Shack do not provide good quality syrups and the weather in the city of El Centro, California is warm for seven months. Hence Ice Dreams have a good chance of establishing themselves as the market leaders in this city. On the other hand Interstate Travel Centre faces less competition but they are not the first movers in the market of providing such services and the lack of experience and knowledge of the co-owners in this industry may cost them potential earnings. Although the competition is low in the area but the businesses already established in the area may react quickly and improve their services to retain customers hence Interstate Travel Centre may have to market themselves and spend a hefty chunk on marketing so that they can gain a large number of customers. Hence in hindsight the Interstate Travel Centre business is very risky from financial aspects and also from the lack of experience of the owners. Interstate Travel Centre will have the highest discount rate and R J Wagner & Associates Realty will have the lowest discount rate. Works Cited Brigham, E. F., & Ehrhardt, M. C. (2005). Financial Management: Theory and Practice. USA: South-Western Cengage Learning. Garrison, D. S. (n.d.). Overview: Time Value of Money. Retrieved May 4, 2011, from Study Finance. Read More