The Analysis of the Assessment of the Overall Status of the Firm McDonald's - Case Study Example

BUSN 5200 I. Homework Assignment There are three steps in the general approach to capital budgeting. First, the decision maker must make a list of possible long term investments. Second, the decision maker shall study the advantages and disadvantages of each alternative capital investment, taking into consideration the variance of each project’s net cash inflows. Third, the decision maker must choose the best alternative (McGuigan, 2010). 2. Incremental cash inflow is the list of the company’s cash outflows as well as a list of the company’s cash inflows. The cash outflow represents all payments for purchases of capital investments as well as operating expenses. The cash inflow includes the revenues from the project. The net cash flow is the difference between the cash inflows and the cash outflows (McGuigan, 2010). 3. Cash inflow $110,000 Depreciation (MACRS 20% x 200,000) - 40,000 Costs - 45,000 Profit before $ 25,000 Tax ( 35% x $25,000) 8,750 Profit after tax $ 16,250 Depreciation (MACRS) 40,000 Cash flow $ 56,250 ======= 4. Payback period indicates how long the business or entity will recover its investments or capital budgeting amount. In terms of the payback period decision rule, the project that has the shorter payback period is better than another project having a longer payback period (McGuigan, 2010). 5. The payback period is arrived at by dividing the initial investment of $50,000 by the net cash flows each year, $10,000. he payback period is 5 years (McGuigan, 2010). 6. a. Using algebra, Let X = breakeven point in units. $ [200/100 units] (x) - $ 0.80x - $20 - $30 = 0 X =42 units             Unit     units 42 Price     sales 84 2     Variable cost 34 0.80     50     Fixed cost 30     interest 20     Net profit before tax 0     tax 0     Net profit after tax 0             b. Breakeven chart for this firm. At 100 units, the net income after tax is $46.00. On the other hand, at 42 units, net income after tax is $ 0.00 (McGuigan, 2010). 7. The net present value method in capital budgeting shows the variance between two amounts. The first amount is the cash inflows. The second amount is the cash outflows. The net present value is the difference between the total cash inflows and the total cash outflows. The decision maker should invest in a project if the total present values exceed the total cash outflows (McGuigan, 2010). In economic terms, the net present value represents the contribution of the investment to the firm’s value, and to shareholders’ wealth maximization. The present value is the value today of a future amount cash amount or series of cash payments computed using the appropriate discount interest rate (McGuigan, 2010). 8. Present Value (McGuigan, 2010): Year 1 $ 6,000 x 0.9091 = $5,455 Year 2 $ 4,000 x 0.8265 = 3,306 Year 3 $ 2,000 x 0.7513 = 1,503 Total $ 10,264 Cost 10,000 Net Present Value $ 264 ===== 9. The Internal rate of return is used to determine whether the decision maker should choose the one project over the other alternative projects. If the internal rate of return of a project is lower than the capital investment costs, the decision maker must drop the project. The internal rate of return is the interest rate used to arrive at a net present value of zero. In terms of the Internal Rate of Return rule, the decision maker must choose the project alternative having the highest internal rate of return figure (McGuigan, 2010). 10. Let Y be the Internal Rate of Return (McGuigan, 2010) Present value (Y) x $40,000 = $30,000 Cost $ 30,000 Net Present Value $ 0 IRR figure = $30,000 / $40,000 = 0.75 IRR rate 30% 35% IRR figure 0.769 0.741 Exact IRR Rate = 30% + ([35% -30%] x [(0.769 -0.750) / (0.769 -0.741)]) = 31.79% II. Financial Statement Analysis: Comparing McDonalds and Burger King. Financial statement ratios indicate McDonalds is a good business investment (Crosson, 2011). In terms of Liquidity, McDonalds performed better than Burger King. McDonalds current ratio, 1.49 is higher than Burger King’s current ratio, 1.18. McDonalds quick ratio, 1.46, is higher than Burger King’s quick ratio, 1.18. In terms of debt management, McDonalds performed better than Burger King. McDonalds debt ratio, 1.18 is more effective compared to Burger King’s debt ratio, 2.82. McDonalds times interest earned, 16.53 is bigger than Burger King’s times interest earned, 1.17. In terms of profitability, McDonalds performed better than Burger King. Further, other financial ratios indicated McDonalds also shows a profitable picture (Crosson, 2011). McDonalds net profit margin, 20.5% is larger than Burger King’s net profit margin, -22.7%. McDonalds return on assets, 15.5% is bigger than Burger King’s return on assets, -1.9%. McDonalds return on Equity, 33.8% is superior to Burger King’s return on equity, -7.3%. In terms of profitability, McDonalds outshined Burger King. McDonalds total asset turnover, 0.75 is better than Burger King’s 0.08. McDonalds average collection period, 21.50, is better than Burger King’s 3.35. McDonalds price earnings ratio, 16.76 is more attractive compared to Burger King’s -30.67. III. Conlusion: summary of Analysis. In terms of summary of the analysis of the assessment of the overall status of the firm, McDonalds shows an overall profitable picture. In terms of Liquidity, McDonalds performed better than Burger King. In terms of debt management, McDonalds performed better than Burger King. In terms of profitability, McDonalds outperformed Burger King. McDonalds total asset turnover is higher than Burger King’s total asset turnover. McDonalds average collection period is faster than Burger King’s average collection period. McDonalds price earnings ratio is superior to Burger King’s price earnings ratio. Recommendations There are many recommendations to McDonald’s current business strategies. McDonalds must continue to sell new products to its current and prospective clients. McDonalds must conduct regular surveys as guides for generating new products. The new products will fill the changing needs, wants, and caprices of the McDonalds fast food market segment clients. McDonalds must venture into reducing avoidable expenses to ensure higher net profits. References: Crosson, S. (2011) Managerial Accountng. London, SouthWestern Press. McGuigan, J. (2010). Managerial Economics. 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