Write a 1,000 – 1,200 word paper. Include the following:
· Change the model variables. The changes should include the assumptions below.
· Assume the bank interest rate would be prime + 2%. (as of first day of class)
· Assume the mortgage interest rate will be 10-year US Treasury rate +2.5% (as of first day of class)
· Assume that 10% of the inventory has become a write-off due to obsolecense.
· Describe the cost of capital in your own words, in plain English.
· Describe how the cost of capital affected the attractiveness of each alternative.
· Present your NPV calculations for each alternative.
Calculate net present value of future cash flows for both of the alternatives based on your adjusted financial model
Shop Paper (©2011 William Mellett) Balance
Sheet 12/31/20XX Restaurant Beauty Shop Assets Cash 10,000 10,000 Accounts Receivable 50,000 50,000 Inventory 10,90,000 10,90,000
Total Current Assets 11,50,000 11,50,000 Fixed Assets 20,00,000 20,00,000 Other Assets - Goodwill 2,50,000 2,50,000
Total Long-Term Assets 22,50,000 22,50,000 Total Assets 34,00,000 34,00,000 Liabilities Accounts Payable 50,000 50,000 Short-Term portion of LT Debt 1,30,000 1,30,000 Bank Revolving Loan 1,50,000 1,50,000
Total Current Liabilities 3,30,000 3,30,000 Mortgage 18,70,000 18,70,000 Other Long-Term Debt 0 0
Total Long-Term Liabilities 18,70,000 18,70,000 Total Liabilities 22,00,000 22,00,000 Equity Owner's Investment 10,00,000 10,00,000 Undistributed Earnings 2,00,000 2,00,000 Total Equity 12,00,000 12,00,000 Total Liabilities and Equity 34,00,000 34,00,000 Out of Balance 0 0
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