Case Study - The Basics of Capital Budgeting Assignment Help
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Question : Write summary of the given case studies
Case study 4- The Basics of Capital Budgeting: Evaluating Cash Flows
Case study 5 - Source of Finance- Teaching case studies : Venturing for growth - A 3i Group case study
Case study 6 - Money markets and more : A Bloomberg case study
Answer : Summary of Cases Report
Case 4: Mini case
The case reveals being own boss for a new venture. The person has received one million dollars from his grandfather and decided to establish a franchise in the fast food area. The time period set was three years for the new venture sale.
Selection for franchisees was focused on L. Lisa soups, salad and stuff and franchise s, Sam’s fabulous fried chicken. Forecasts of L. Lisa reflected slow sale initially but a rapid increase in sale after some time as people become aware of health-friendly food. Franchise S cash flow reflected a high sale in an early phase but with people growing awareness of health-friendly food, the slow sale was possible. It was found that franchise L offered breakfast and lunch whereas franchise S offered the only dinner therefore, both franchises were decided to be purchased. The projected cash flow of franchise L reflected 10000 dollars in the first year, and gaining good cash flow in a second and third year respectively 60000 and 80000 dollars. For franchise L, the cash flow was 70000 dollars in the first year that reduced to 50000 dollars in the second year and 20000 in the third year.
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Subjective risk assessment was done for each franchise and it is found that risk characteristics of each franchise required a return of 10 percent. The questions asked in the mini case are about capital budgeting, independent and mutually exclusive projects difference, net present value definition for each franchise, rationality behind NPV method, definition of internal rate of return, logic behind the IRR method for selection of franchise, creating NPV profiles for each franchise, considering the NPV profile selection of franchisee, description of ranking conflicts causes between IRR and NPV, definition of profitability index measure, payback period for each franchise, rationality of payback period, difference between discounted and regular payback period, benefits and drawbacks of discounted payback to determine its usefulness for capital budgeting decisions.
The case also considered another project having a physical life of three years and its estimated cash flows were offered. The case required to determine the project NPV by using 10 percent capital cost as well as changes in NPV if the project terminated in the second year. It also asked to determine the optimal life of the project at the end of the first year.
Case study 5: venturing for growth- a 3i group case study
The report focuses on the role of the 3i group that is founded in 1945 and it plays a key role to provide capital for business expansion. 3i generally is a risk-taking organization supporting entrepreneurial activities of companies. Investment decisions are based on management quality as well as the potential of a business. The investment offered by the company is generally between 100000 and 30 million pounds. Before investing management integrity of the business and its growth potential are considered by 3i.
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The report mentions about organic growth and growth by acquisition. Various categories of investment are being considered by 3i such as growth capital, emerging business, management buy outs, management buy-in and share purchases to invest. The approach of 3i reflects working with management teams of companies and its investment executives are well supported by the specialist industrial adviser's team. The 3i approach can be understood by looking at two case studies. 3i assisted Denby management buy-out by involving hard work that included communication with customers and employees, separating accounting systems, creation of new company identity and capitalizing upon media interest.
For this purpose, local office o 3i was well supported by the industrial advisers. Assistance to Denby's was based on an impressive performance by the management team of it and a good track record of the development of the product. With this buy-out support, and obtaining finance from 3i, Denby Pottery did well with a 40 million pound market capitalization. Similarly, 3i contribution to survey envelopers assisted this company to achieve a broad customer base. The findings of this case suggest that financial company decisions to provide loans to entrepreneurs and companies based on management integrity and experience are essential to support the financial company operation such as a 3i company.
Case study 6: A Bloomberg case study
This case study explores the development of the Bloomberg Company for its entrepreneurial activities. It has been recognized as a major company to provide financial services. Therefore, in this report, the causes of its success are elaborated.
It is found that the company has fostered an entrepreneurial culture as the company follows a small company ethos. Employees are asked to contribute their valuable ideas and take projects ownership. Empowerment of employees, carving out clear roles and establishing key skill sets for employees assist the company to gain prominence. Therefore, the Bloomberg Company required from traders and investors to be familiarised with interest rates movement, economic statistics and announcement, currencies, movement of stock price and recommendations of analysts.
The company has tailor-made its products according to the needs of customers. It offers Bloomberg news supported by a large number of employees and the news appeared on various media such as TV, radio, magazines and on Bloomberg professionals.
The company also provides dynamic data to assist clients to populate pricing models and proprietary valuation, technical analysis package to offer complete tools range enabling users to explore market movements, electronic trading to enable customers of banks to connect with trading floors, exchange links on a computer network, order routing facility to specific brokers, and Bloomberg trademark and Bloomberg television.
Along with these initiatives, Bloomberg Company does customer profiling for targeted advertising. On the digital platform, the company offers Bloomberg interactive television that allows customers to customize the screen and digital platform enables the company to communicate with customers all the time. Bloomberg Company also has a website that provides services such as offering websites portfolio and sharing live video.
These initiatives make the Bloomberg Company a formidable company in the financial sector.
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