5 Fortune: One of Many Chinese Restaurants Case Study Solution
Mortgage financing analysis
While using the mortgage to finance the business, the net cash flows, net income, return on equity, payback period and breakeven point of the project under the best, medium and worst case scenario are calculated by applying the percent capacity for each scenario. Under the best case scenario, the net cash flows are amounted to $2370 while the net income is calculated to be $(630). The ROE is 14% while the payback period is 29.53 years and break-even point is 37155.
In addition to this, under the medium case scenario, the net cash flows are amounted to $(86250) while the net income is calculated to be $(89250). The ROE is 10% while the payback period is -0.81 years and break-even point is 12670000.
Under the worst case scenario, the net cash flows are amounted to $(81210) while the net income is calculated to be $(84210). The ROE is 7% while the payback period is -0.86 years and break-even point is -37375.
50-50 ownership
While using the 50-50 ownership, the net cash flows, net income, return on equity, payback period and breakeven point of the project under the best, medium and worst case scenario are calculated by applying the percent capacity for each scenario. Under the best case scenario, the net cash flows are amounted to $13080 while the net income is calculated to be $10080. The ROE is 14% while the payback period is 5.35 years and break-even point is 18152.
In addition to this, under the medium case scenario, the net cash flows are amounted to $10560, while the net income is calculated to be $7560. The ROE is 10% while the payback period is 6.62 years and break-even point is 35391.
Under the worst case scenario, the net cash flows are amounted to $8040 while the net income is calculated to be $5040. The ROE is 7% while the payback period is 8.70 years and break-even point is 703889.
Net present values of best, medium and worst case scenario
Assuming that Li uses the mortgage financing, the net present values under the best, medium and worst case scenario are calculated to be $39500, (1437500) and (1353500) respectively. The amounts are calculated by dividing the cash flows generated under each scenario by the weighted average cost of capital or 6 percent equity.
Sunk cost and recommendation
The sunk cost refers to the unrecoverable cost which the company could no longer recover. Li should not drop the project due to the fact that the net present value of the project is positive or greater than zero which means the project would be feasible and lucrative, hence making the likelihood of project profitable over the period of time. Another factor is that there is no investment business opportunity in the market due to which Li should makes extra efforts of making the existing project more profitable and growing in the future.
Since, the food service industry is ever growing business in Canada and has potential returns over the investment along with the stable political atmosphere, steady economic growth and skilled and well-educated labor force tends to contribute to the trade environment and positive business for both large and small companies in various segments including beverage and food, there is a likelihood that the business would be growing in the Canadian food service industry.(The Canadian Consumer, 2010).
Exhibit A – Pros and cons of opening Chinese restaurant in Canada
|
Advantages |
Profit potential in terms of long term return on the invested capital
Overcome customer loyalties & brand identification via selling good quality product, coupled with the niche environment & good service Little capital requirements Highly realizable government policies Limited entry barriers |
|
Disadvantages |
Fierce or strong market competition
Independent and large in size suppliers Suppliers demand high prices |
Exhibit B – Equity financing
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