Business Venture Analysis McDonald’s vs. Burger King

Nancy Macias Organization Brian Myers Summarization Eliseo Sanchez Research & Organization Masis Haroian Techie Team 1 Members & Delegation

Scenario A 30 year old person with a business degree has just inherited $300, and is considering opening a fast food franchise. The two franchises that are being considered are: McDonald’s Burger King

Analysis Assumptions Life Span of 20 years (n = 20 years) Same Resale Value at the end of 20 years Equivalent Cost for Land and Building Equivalent Average Annual Sales and Profit Location, Volume, Size of Real Estate not taken in Consideration (no impact on the analysis) MARR = 15% Interest Rate = 10%

McDonald’s Fact Sheet Initial Franchise Fee $45K Equipment & Pre-Opening Costs $900K Land & Building $1.0 million (only if a new building has to be built) Franchise Fee12.5% Annual Sales$1.3 million Annual Net Profit $500K (after taxes, fees and other operating costs)

Burger King Fact Sheet Initial Franchise Fee $50K Equipment & Pre-Opening Costs $750K Land & Building $1.0 million (only if a new building has to be built) Franchise Fee8.5% Annual Sales$1.3 million Annual Net Profit $500K (after taxes, fees and other operating costs)

Quick Comparison McDonald’s 12.5% Franchise Fee 12.5% Franchise Fee $900, pre-opening costs $900, pre-opening costs Annual Costs $162, Annual Costs $162, Burger King 8.5% Franchise Fee $750, pre-opening costs Annual Costs $110,500.00

Analysis Results & Conclusion Analysis Methods Incremental Rate of Return Analysis  ROR Benefit to Cost Ratio Annual Worth Analysis (note: all these methods will result in the same answer if used properly) (we primarily used  ROR primarily to find the better choice) Results:  ROR = 35.8% Since  ROR>MARR, higher cost alternative is chosen, Burger King B/C & AW Analysis confirm results

Sensitivity Analysis (1) Varying the Franchise Fee from 9.0% to 14.0%, Burger King still is a better alternative

Sensitivity Analysis (2) Varying annual profit from $300K to $700K

Resources (official website) (official website) (official website) (official website) Wall Street Journal Wall Street Journal Essentials of Engineering Economic Analysis (textbook), Donald Newnan, Jerome Lavelle and Ted Eschenbach,2 nd edition, 2002 Essentials of Engineering Economic Analysis (textbook), Donald Newnan, Jerome Lavelle and Ted Eschenbach,2 nd edition, 2002

Course Related Useful Websites Provides several calculator for retirement,taxation,savings,investments,etc. Provides Cash Flow Diagram explanations and several examples (PV,FV and others)