VALUING A CHAIN OF MCDONALD’S RESTAURANTS James and Mary Watson own a small chain of McDonald’s restaurants that is valued at $2,300,000. They believe that the chain will grow in value at 12% per year compounded annually for the next 5 years. If they sell the chain, the funds will be invested at a rate of 6% compounded semiannually. They expect inflation to be 3% per year for the next 5 years. Ignore taxes, and answer the following, rounding answers to the nearest dollar at each step. Case Study 1. Find the future value of the chain after 5 years. Then find the price they should sell the chain for if they wish to have the same future value at the end of 5 years. 2. Find the future value of the chain if it grows at only 2% per year for 5 years. Then find the 2. price they should ask for the chain given a 2% growth rate per year. 3. Use the compound amount formula to answer the following: What would the future value of the chain be if it grew at the expected rate of inflation? Find the price they should ask for the chain if it grows at that rate. 4. Complete the following table. Growth Rate Future Value Market Value Today 2% __________ ____________ 3% (inflation) __________ ____________ 12% __________ ____________ The value of the chain varies by more than one million dollars, depending on the rate of growth assumed for the business for the next 5 years. Hint: Compound Interest
VALUING A
CHAIN OF MCDONALD’S
RESTAURANTS
James and Mary Watson own
a small chain of McDonald’s restaurants that is valued at $2,300,000. They
believe that the chain will grow in value at 12% per year compounded annually
for the next 5 years. If they sell the chain, the funds will be invested at a
rate of 6% compounded semiannually. They expect inflation to be 3% per year for
the next 5 years. Ignore taxes, and answer the following, rounding answers to the
nearest dollar at each step.
Case Study
1. Find the
the chain for if they wish to have the same future value at the end of 5 years.
2. Find the
future value of the chain if it grows at only 2% per year for 5 years. Then
find the 2. price they should ask for the chain given a 2% growth rate
per year.
3. Use the
compound amount formula to answer the following: What would the future value of
the chain be if it grew at the expected rate of inflation? Find the price they
should ask for the chain if it grows at that rate.
4. Complete
the following table.
Growth Rate Future
Value Market Value Today
2% __________ ____________
3% (inflation) __________ ____________
12% __________ ____________
The value of the chain
varies by more than one million dollars, depending on the rate of growth assumed for the
business for the next 5 years.
Hint: Compound Interest
INVESTIGATE
The
interest rates that a bank pays depend on whether the money is in a checking
account,
bank and find the different interest rates that the bank will pay. Identify the
conditions such as the minimum amount required, the minimum deposit, and the
length of time the money must be on deposit to earn each interest rate. (Can search online, no need to go the bank)
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