After graduating, a UCW student is considering buying a franchise from a renowned burger joint.
- The student has limited funds and is considering just one restaurant in downtown
Vancouver. He assumes he will need at least 1800 sq. ft. to accommodate a seating capacity
of 40 customers, his staff, and the equipment/furniture required to operate his restaurant. - Per the franchise agreement, he will have to make an upfront payment of $20,000 as a
franchise fee, entitling him to be the franchisee for the next five years. He will be entitled
to use the know-how, patent, copyright, trademark, and all other intellectual property of the
burger joint during that period. - He will also have to use the franchisor’s POS system for billing and must pay 5% of his
gross sales as a franchise continuing fee at the end of every quarter. - The student will be fully responsible for all CapEx and OpEx to run the business. However,
the franchisor will provide training, monitoring, and supervision to the student’s business,
costing the franchisor $50,000. - He wants to construct the entire restaurant from scratch. He has an estimate from a
contractor to build the store’s interior, including the kitchen area, for $150 per sq. ft., which
will take six months to complete. He wants to install two state-of-the-art burger-making
machines from Texas, USA, each of which will cost him USD 100,000 and an additional
USD 10,000 to get it delivered to his location. Additionally, he will need five computers
for $1,200 each, furniture costing $45,000, $80,000 in HVAC, and $150,000 in other
kitchen equipment and cutleries. (Feel free to assume more capital investments he might
need to start his business.) - During the construction period, he assumes his hydro bill to be about 5% of the monthly
rent; during normal business operations, he assumes the hydro bill to be about 8%. - The rent of such property would be $ 20 per sq. ft. per month, and it is customary to increase
the rent by 10% every two years. He will also have to deposit three months’ rent as security
for damage, which will be fully refunded at the end of five years when his contract expires.
Furthermore, he will have to pay a month’s rent as a finder’s fee to a realtor for finding him
such property. - Since his store will not be operational for six months after the start of the business, he
decides he does not need to hire anyone except himself for the first four months. He will
be working full-time for the restaurant, earning a salary of $80,000 annually. After four
months, he expects to hire a manager to put him/her on training. The manager’s estimated
pay package is worth CTC (cost to company) $60,000 per annum. A month later, he would
hire a team of 12 consisting of servers and cooks, all working for minimum wage. The
franchisor will train them for a month before the grand opening, which is estimated to be
in the seventh month. The company will have a policy to increase management’s salary by
5% every year while the other employees’ wages will be increased by 3% every year. These
salaries are CTC (cost to company) numbers, and there will be no additional expenses
related to human resources.
(Note: All pre-operational expenses incurred before the start of the operations are to be
treated as his capital expenditure. For CCA calculations assume pre-operational
expenses as a part of the construction of the store) - He assumes that he might be unable to make immediate profits and, therefore, after the
grand opening, he would need six months of rent, hydro, and salary expenses and at least
two months of inventory as working capital to start the business. - A bank manager from RBC advised him that his bank might be willing to contribute 20%
of the funds needed if he could pump 80% of the equity. The terms of the bank loan would
be as follows:
a. Interest rate: Current Prime rate + 4%
b. Loan term: 5 years.
c. Payment terms: Quarterly payment - If he were to invest his money in the market, he would expect at least a 12% return on his
investments. However, he expects a premium return for this project, assuming Beta is 1.8.
(Use the Capital Asset Pricing Model to find the cost of equity. Assume the risk-free rate
is the Government of Canada benchmark 10-year bond yield. CAPM formula is in the
Excel sheet) - The discounting rate for capital budgeting will be the WACC.
(The WACC (cost of the capital) chapter has not been done, and therefore, a table
computing the cost of capital is provided in the Excel Sheet) - The economics of his three products are presented below.
Particulars Jumbo Burger Mid-sized Burger Small Burger
Selling Price $19.99 $14.99 $11.99
Cost to Make $4.99 $3.99 $2.99
Sales Composition 30% 50% 20% - He believes that with a seating capacity of 40 people, he can serve about 220 customers in
the shop in a day, accounting for 50% of the total sales. The remaining 50% will be
takeouts. - Furthermore, he believes that with time, the number of customers will grow, and the sales
will grow at the rate of 20% for the first two years, 10% for the next two years, and by 3%
forever after that. - His running costs include the following, amongst other things:
Rent (Details provided above)
Utilities (Details provided above)
Salary (Details provided above)
Digital Promotion (2% of sales)
Miscellaneous (3% of sales) - He will be registered as a small business in BC as a CCPC for tax purposes.
- At the end of the fourth year, he expects to sell old kitchen equipment for $30,000 and
invest another $100,000 in new kitchen equipment. With the increase in sales, he will
increase his inventory investment.
A template of the Excel sheet has been provided with a proforma of each statement.
A. Using the template, you are required to calculate the cash flow from assets. (30)
B. Using the cash flow from A’s assets, calculate the NPV, IRR, payback period, and
discounted payback period in your workbook. Explain if the student should start this
business. (50)
Critical thinking question (30)
Can you rely on the IRR you have calculated, or does it have some limitations? Please explain how
you would address its limitations. (Max 400 words)
Submission
You are required to submit an Excel file containing all your calculations and a PDF file containing
your analysis of the financial feasibility of the business and your answer to the critical thinking
question.
Read the instructions.
The assignment might feel overwhelming in the beginning. Take the time to read the
question and review the Excel sheet at the beginning. Please don’t rush into the assignment;
You need to understand the assignment before starting it.
The assignment has been designed not to test you but to train you while doing the
assignment on the practical application of capital budgeting techniques.
Organize all the data, keep what you need, ignore what you don’t need, and research
information you might need or information you do not understand.
Remember the class lecture. As a finance professional, the end goal is to be able to find the
cashflows. After we have the cashflows, we can easily apply the capital budgeting
techniques.
Start by identifying the capital expenditures and working capital needed initially.
Build the income statement in the CFFA sheet to calculate the cash flows. Follow the flow
of the income statement discussed in the class and presented in the sheet, and you will be
fine.
Calculate each item as you move along the income statement. Calculate interest expenses,
depreciation expenses, taxes, etc., as needed.
Use the OCF and CFFA formulas to find the CFFA.
Your cost of capital is your discounting rate for DCF and for capital budgeting. The Excel
sheet will do the calculation.
Some information might not make sense. Research their meaning.
Some information might be incomplete; make assumptions.
You must use your analytical skills, business acumen, and finance knowledge to do the
assignment.
Read the rubrics carefully. Your grades will be based on the rubrics.
Most importantly, do not copy from others or share your answer with your peers. All
students should have a unique answer. The use of AI and plagiarism is strictly
prohibited.
All the best.