Question 1.
ABS Foods and Beverage is doing retail and wholesale business, but they are considering three diversification ventures. The first involves restaurant chains in inner BC. The second is a hotel business in Kelowna nearby the airport within the business park. The third one is still developing. Management wants to make a decision based on only five years of projected cash flow, because the future performance beyond that time is too vague to form a basis for current decisions. Their planning department has put all available information together and projected cash flows for each one. ABC Foods' cost of capital is 7%.
|
Year
|
Restaurant chain ($)
|
Hotel ($)
|
|
0
|
-3,000
|
-4,000
|
|
1
|
-500
|
-1000
|
|
2
|
500
|
800
|
|
3
|
1000
|
1200
|
|
4
|
2000
|
2000
|
|
5
|
2000
|
3000
|
(Unit: thousands)
1) Evaluate each business opportunity by NPV.
2) Using MS Excel, find IRR for each business opportunity
3) If you have to pick only one of three and the third business opportunity promises the IRR of 10%, which one is your choice and why?
Question 2.
ABC Accounting is considering a new office to provide accounting services to business customers. Currently, four locations were studies and each location is expected to incur different amount of annual fixed cost and variable cost as follows.
|
Location
|
Fixed Cost/yr
|
Variable Cost/customer
|
|
A
|
$150,000
|
$620
|
|
B
|
$300,000
|
$380
|
|
C
|
$500,000
|
$240
|
|
D
|
$600,000
|
$300
|
1) Find a break-even-point for each location assuming a service rate per customer is $1,000.
2) Plot the total cost curves for all the locations on a single graph and identify on the graph the range over which each location provides the lowest cost.
3) If expected demand is 1,100 customers/year, what is the best location?
Question 3.
SYM Professionals has recently contracted with UBCO for providing entrepreneurship consulting services. This is a new project with the following schedule. In the case that the client wants to shorten the project duration with minimum costs, provide your recommendation by suggesting the order of activity crash.
|
Activity
|
Immediate
predecessors
|
Time (Week)
|
Cost ($)
|
|
Normal
|
Crash
|
Normal
|
Crash*
|
|
A
|
-
|
2
|
1
|
22,000
|
22,750
|
|
B
|
A
|
3
|
1
|
30,000
|
34,000
|
|
C
|
B
|
4
|
3
|
48,000
|
49,600
|
|
D
|
B, C
|
3
|
1
|
56,000
|
58,000
|
|
E
|
C
|
6
|
4
|
30,000
|
31,000
|
|
F
|
D
|
5
|
2
|
80,000
|
82,400
|
|
G
|
E, F
|
2
|
1
|
16,000
|
19,000
|
*For maximum crash possible