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 present 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.
When running your numbers, understand that there is no single correct solution to capital budgeting proposals but understand there are better proposals than others. Stated differently, pay more attention to having an estimate of the number “in the proposal” than to having a precise or “accurate” number. When you deal with the future “accurate” numbers are next to impossible. There are only numbers that you can justify base on the past, trends that you observe, and new information. The more glaring mistake to make in putting together the proposal is to leave meaningful revenue, cost, working capital or other numbers “out 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.
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. Please do not turn in an analysis that does not extend and modify the analysis over what we did in the course. More direction is provided in the weekly assignment breakdown.
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. The total project is worth 100 points.
Summary: Capital Budgeting Proposal for Chipotle Mexican Grill Team Project by Week
- During weeks 1 to 3 you should get to know your teammates and discuss the competitive environment, Chipotle’s strategy, and kick around possible project ideas.
- Week 4: Your team will be meet and you (and your teammates) will identify in words 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.
- Week 5: 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.
- Week 6: You (and your team) will “run the numbers” using the five decision models discussed in the course.
- Week 7: Your team will discern the appropriate cost of capital to use for each project.
- Week 8: Your team will conduct sensitivity analysis and suggest ways management can mitigate the risk for each project.
- Week 9: Your team will integrate feedback comments into the final write-up of the project, assemble the spreadsheets for each project, and present in class a 10 minute presentation of the two projects (roughly five minutes on each project). Perform a financial statement analysis based on 10 years of historical data.
Detailed Project Description Week by Week
Using the information given to you in Capital Budgeting Proposal Project overview, the discussion exercise up until now and any other information from the internet (including the investor relations website and press releases) please copmlete the following:
- 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. 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.
- This write-up should be a Word document and should be submitted by Sunday 11:59 PM. Good luck with this worthwhile exercise.
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:
- Identify yourself and your team members at the top of the first page.
- Identify the project.
- 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.
- Repeat steps 3 to 6 for the second project.
- Put together an Excel spreadsheet with the assumptions at the top of the sheet. Followed by the acquisition stage cash flows (remember to carryout and number years to year 8), the operating stage cash flows, the continuing or disposition stage cash flow, and conclude with a grand total of the cash flows for each year.
- Repeat step 7 and put together a second Excel spreadsheet for the second project.
- Turn in both the write-up of the cash flows as a Word document and the two Excel spreadsheets by Sunday 11:59 PM.
Below are two screencastify videos that illustrate the modeling of the cash flows one is for a project involving a building modification or equipment, and the other is for a project that involves a new menu item. These videos illustrate the thought process that you group should go through to arrive at the categories needed for the projects and additionally the logic used in using existing financial statements to estimate the dollar values across the years.
Estimating the cash flow for a project involving new equipment and/or building modification: https://www.youtube.com/watch?v=SJ4o7d6-ONg
Estimating the cash flow for a project involving a new menu item: https://www.youtube.com/watch?v=leDB_uRB3qE
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).
- Repeat steps 1 to 6 for the second project.
- Open a Word document, put your name and your teammates names at the top of the document.
- In a sentence for each result, discuss what the result for each decision model indicates to the capital budgeting committee. For example – This project has a net present value of $XXXX. This indicates …….
- Turn in both the write-up of what the measures indicate to the committee a Word document and the two Excel spreadsheets with the calculated results by Sunday 11:59 PM.
Overview of what you are expected to do this week:
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.
Some groups may go outside Chipotle’s normal business and enter industries with different risk profiles. For these groups you will need to do the following:
- For franchising I would suggest using YUM, Wendy’s, and McDonalds look up their betas on Yahoo Finance and average these betas.
- For farming I would suggest using the betas of Fresh Del Monte (FDP), Archer Daniels Midland (ADM), and Bunge (BG)
- For international expansion I would suggest using YUM Brands of China (YUMC) and Arco Dorados Holdings (ARCO) as a proxy companies in international restaurants. You will need to use Yahoo finance to find their beta and then average these.
- For adding bars, I would average the betas for Dave and Busters’ (PLAY), BJ Restaurants (BJRI), and Chuy’s (CHUY).
Your group will need to get or calculate the average Betas for the firms, the average debt levels (in dollars) and average market capitalizations for these proxy companies (more about how to do this later in these instructions). After you have collected these data, you can use the following assumptions in calculating the project’s weighted average cost of capital:
- Debt will have an after-tax cost of 4%.
When using the capital asset pricing model to calculate the cost of equity capital use these assumptions:
- The risk-free rate of return is 3.5%
- The Beta is whatever you averaged from the proxy companies.
- The market risk premium is 5%
To get your weightings of debt and equity:
- Look up the debt levels for each company using balance sheets (be careful to have the correct number of zeros – many are in thousands).
- Take the stock price times the total share outstanding to get the company’s market capitalization or value of equity or read it from Yahoo Finance.
- Add the two and divide by the total to get the weightings.
Complete the calculation of this project or divisional cost of capital as illustrated in the lecture notes.
- Take the 4% cost of debt times the weighting for debt
- Take the cost of equity capital (as calculated by the capital asset pricing model) times the weighting for equity
- Add the two to get the weighted average cost of capital
Below your group will find a URL to a YouTube Video that illustrates the procedure to calculate a project cost of capital for a project outside the normal course of the firm’s business: https://www.youtube.com/watch?v=Pj7FE8k9OZ0
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 firms 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. Specifically, please do the following:
- Identify yourself and your team members at the top of the first page.
- In the first paragraph describe how the project will bring risk to the company or decrease the risk of the company. If the project is within the existing risk profile of the company — you do not need to do the next step.
- If the project is outside the normal operations of the firm, such as entering a new line of business, then
- look up the betas for firms in that business and average the betas for these firms,
- recalculate the cost of equity for this project,
- find the average debt to asset level in this new industry,
- recalculate the weighted average cost of capital for the project (please show your work in how you calculated this project’s weighted average cost of capital .
- Repeat this step for the second project.
- Turn in write-up as a Word document by Sunday 11:59 PM.
This week your team will calculate the net present value break-even point for each project and suggest ways management can mitigate the risk for each project.
- Open the Excel spreadsheet from the prior week and copy your information to a new tab.
- Label this new tab in the spreadsheet “Sensitivity Analysis”.
- Pick at least two variables in the spreadsheet to “flex” by 5% up and down (for variables that cover more than one year please remember to change all years). Move these variables up 5% and recorded the new net present value. Take the difference between the new net present value and the original net present value and divide by the original net present value to get the percentage change in net present value. Record what you changed and the percentage change in net present value.
- Open a word document and identify yourself and your team members at the top of the first page.
- Use the first paragraph to discuss the first variable that your team “flexed”. Please describe the variable, the percentage change in the variable (if different than 5%), and the percentage change in the net present value as a result of the change. Remember to note if it is a decrease or increase in Net Present Value. Use a second paragraph to describe the projects sensitivity to the second variable.
- The next two paragraphs should discuss two actions that your group believes management can do to mitigate the risk of this project.
- Turn in the Word write-up for both project on a single word document and the two Excel spreadsheets (one for each project) by Sunday 11:59 PM.
This week your team will prepare a 5 to 10-minute presentation of your proposal for each project. These two presentations should be assembled as if they were being presented to the capital budgeting committee of Chipotle Mexican Grill. Both presentations should include:
- A PowerPoint presentation for each project where all members of the team present some portion of the presentation.
- Please identify the “social, environmental, governance project” apart from the other project and discuss the stakeholders that will benefit from this project.
- A comprehensive summary of each project.
- The presentation should list the critical assumptions.
- Display spreadsheet results as tables, not as entire spreadsheets.
- Include your discussion of risk present with the project and suggest risk mitigation alternatives.
- Include your recommendations to the committee.
Refer to the Capital Budgeting Proposal Project overview as needed.
All groups will present on the last night of class. Each project presentation is worth 15 points. Please submit your final write-up and any corresponding documents below prior to the last night of class. Thank you, have fun, and good luck. I look forward to seeing your work.
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