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For this project, you and your teammates will act as the project proponents for two projects (of your invention) for consideration by the capital budgeting committee at Chipotle Mexican Grill. During the first three weeks of this course in the discussion exercise you will read and research the actual real company on Chipotle Mexican Grill and three of their competitors in the restaurant industry.
Beginning in the fourth week, teams will meet; you and your teammates will identify two different projects that your team believes will exploit a strength, ameliorate a weakness, take advantage of a perceived future opportunity, or neutralize a potential threat for Chipotle.
In the fifth week your team will identify relevant cash flows related to each project and build a spreadsheet for each project projecting these cash flows into the future. In the sixth week, you and your team will “run the numbers” using the five decision models discussed in the course. During the seventh week you and your team will discern the appropriate cost of capital to use for each project.
During the eighth week you and your team will conduct sensitivity analysis on your project to determine the sensitivity of net present value to changes in assumptions and conclude with suggestion on ways management can mitigate the risk for each project. For the ninth week, you and your team will integrate feedback comments into the final write-up of the project, assemble the spreadsheets for each project, and record a 10 minute presentation of the two projects (roughly five minutes on each project).
Suggestions on how to make your project experience more productive
Actual due dates for the project begin in week 4 but you (and your team) may want to “brainstorm” after the first week. You will work in groups of 3 or 4 students. Each student is expected to meaningfully participate with the others in the group on each section of the project.
Do your own work and be imaginative or creative in your project ideas. Where you use external sources to support your proposal, please cite the source either in footnote form or at the end of the proposal.There are hundreds of capital budgeting help tools on the internet. You should look at these to get ideas but do not claim other’s work as your own.
There are hundreds of capital budgeting help tools on the internet. You should look at these to get ideas but do not claim other’s work as your own.
You may find it helpful to use some of the spreadsheets that we build over the course as starting points in your analysis. Remember, these are starting points and need to be modified (often substantially) to fit your proposal.
Identify yourself and your team members on the top of the first page. Begin the proposal with a discussion of Chipotle’s strengths, weaknesses, opportunities, and threats. There should be a paragraph at least for each of the four topics. Next discuss Chipotle’s strategy. This should be a couple of paragraphs in length.
Introduce your first project proposal. This project should have some impact on the environmental stakeholder, the societal stakeholder, the employee stakeholder, the supplier stakeholder, as well as the traditional stockholder. In other words, this project should show a win, win, win.
This project is broken into sections with different sections due in different weeks. Instructions are provided for each portion of the project in the week in which that portion is due. You will be provided feedback with the grading of each section. You should incorporate this feedback (if any) into your final report, spreadsheet, and presentation.
Capital Budgeting Proposal Project
The first win is typically for the customer, the second win is one of the other stakeholders, and the last win is the stockholder. This will probably be your more difficult project to develop. Be creative but constrained by reality. Several paragraphs should be used to describe the project. In this description include the parties that benefit and why you believe this fits the strategy of Chipotle.
Introduce your second project.
This project can be a more traditional project that benefits the customer and one other stakeholder or the stockholder. Again, try to be creative but constrained by reality. Several paragraphs should be used to describe the project. In this description include the parties that benefit and why you believe this fits the strategy of Chipotle.
Identifying Relevant Cashflows Assignment
Begin with the two project proposals submitted last week (and make any recommended changes if any given in the grading of the assignment). This week you will describe in detail the expected cash flows to be caused by the projects. Put another way you will describe in words your assumptions. After you complete your description in words, you will need to build an Excel spreadsheet illustrating the cash flows over the life of the project. Specifically, please do the following:
In a Word document, in words and numbers, describe the cash inflows and outflows needed in the acquisition stage of this project’s life. Remember initial outlays for equipment, buildings, land, upfront advertising and promotion, training, and other inputs. Do not forget working capital and any assume relationships with drivers.
Continuing in the Word document, in words and numbers, describe the cash inflows and outflows expected in the operating stage of this project’s life. Remember revenues, possible lost revenues, all the cost discussed in the course, whether these costs are fixed or variable and what relationships they have with the driver, assumed income tax rate, depreciation, and any other relevant inputs.
Conclude the write-up with a description of how you expect to exit or not exit this project. For equipment type project the equipment will wear out and there will be no deposition value, for building type projects (like drive-throughs and menu enhancements) there not be a disposition value but a continuing value. For this value I would recommend taking the eight year estimate of cash flow from operations and multiplying by 5 and using this as a continuing value and label it as such.
Running the Numbers Assignment
Using the Excel spreadsheets that your team submitted last week (make any recommended changes if any given in the grading of the assignment). This week you will run a net present value, a profitability index, an internal rate of return, a payback, and a present value payback on both projects. After doing this, describe in words what these measures tell the capital budgeting committee. Specifically, please do the following:
Open your Excel spreadsheet for the first project and make any changes that have been suggested by the instructor in grading the assignment (or do not if you believe your numbers are more representative).
At the bottom of the spreadsheet, using an 8% cost of capital, calculate the net present value for the project.Next calculate the profitability index for this project. Label and calculate the internal rate of return.Label and calculate the payback period.
Label and calculate the present value payback (using the same 8% cost of capital).
Week 7: Justifying Your Cost of Capital Assumption
This week your team will need the weighted average cost of capital to use for each project. For projects in the existing line of business the appropriate cost of capital is the firm’s cost of capital (or in Chipotle’s case an 8% cost of capital is warranted). For project outside the normal course of business, the cost of capital must be adjusted up or down from the corporate rate compensate for the increased risk or the decrease risk brought to the corporation by the acceptance of this project.
The write up should read some as follows:
For the ____________________ project we believe this project will have more risk, have less risk, or will equal risk (pick one) with Chipotles’ existing business. For the following reasons ………………………………………………………………
If the project is outside the normal operations of the firm, such as entering a new line of business, franchising, urban farming, international expansion, adding bars, then look up the betas for firms in that business and their debt to total assets percentages. For menu expansion projects, your job is done because these projects would have equivalent risk to existing operations of Chipotle. So, you do not need to go any further.
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