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Business Venture Analysis

Business Venture Analysis. McDonald’s vs. Burger King. Team 1 Members & Delegation. Nancy Macias Organization Brian Myers Summarization Eliseo Sanchez Research & Organization Masis Haroian Techie. Scenario.

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Business Venture Analysis

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  1. Business Venture Analysis McDonald’s vs. Burger King

  2. Team 1 Members & Delegation • Nancy Macias Organization • Brian Myers Summarization • Eliseo Sanchez Research & Organization • Masis Haroian Techie

  3. Scenario • A 30 year old person with a business degree has just inherited $300,000.00 and is considering opening a fast food franchise. The two franchises that are being considered are: • McDonald’s • Burger King

  4. Analysis Assumptions • Life Span of 20 years (n = 20 years) • Same Resale Value at the end of 20 years • Equivalent Cost for Land and Building • Equivalent Average Annual Sales and Profit • Location, Volume, Size of Real Estate not taken in Consideration (no impact on the analysis) • MARR = 15% • Interest Rate = 10%

  5. McDonald’s Fact Sheet • Initial Franchise Fee $45K • Equipment & Pre-Opening Costs $900K • Land & Building $1.0 million • (only if a new building has to be built) • Franchise Fee 12.5% • Annual Sales $1.3 million Annual Net Profit $500K • (after taxes, fees and other operating costs)

  6. Burger King Fact Sheet • Initial Franchise Fee $50K • Equipment & Pre-Opening Costs $750K • Land & Building $1.0 million • (only if a new building has to be built) • Franchise Fee 8.5% • Annual Sales $1.3 million • Annual Net Profit $500K • (after taxes, fees and other operating costs)

  7. McDonald’s 12.5% Franchise Fee $900,000.00 pre-opening costs Annual Costs $162,500.00 Burger King 8.5% Franchise Fee $750,000.00 pre-opening costs Annual Costs $110,500.00 Quick Comparison

  8. Analysis Results & Conclusion Analysis Methods • Incremental Rate of Return Analysis ROR • Benefit to Cost Ratio • Annual Worth Analysis (note: all these methods will result in the same answer if used properly) (we primarily used ROR primarily to find the better choice) Results: • ROR = 35.8% • Since ROR>MARR, higher cost alternative is chosen, Burger King • B/C & AW Analysis confirm results

  9. Sensitivity Analysis (1) Varying the Franchise Fee from 9.0% to 14.0%, Burger King still is a better alternative

  10. Sensitivity Analysis (2) Varying annual profit from $300K to $700K

  11. Resources • http://www.bk.com/(official website) • http://mcdonalds.com/(official website) • http://www.franchise-zone.com/food_franchises.shtml • Wall Street Journal • Essentials of Engineering Economic Analysis (textbook), Donald Newnan, Jerome Lavelle and Ted Eschenbach,2nd edition, 2002

  12. Course Related Useful Websites • http://www.fincalc.com/ • http://www.mikemillerfinancial.com/calculators.cfm?ID=125 Provides several calculator for retirement,taxation,savings,investments,etc. • http://www.getobjects.com/index.html • Provides Cash Flow Diagram explanations and several examples (PV,FV and others)

  13. THE END

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