This is an interesting situation you have one organization that is already well established (Silvera and Sons) and two others that are just starting up (Acme Consulting and Interstate Travel Center). Silvera and Sons should have the highest discount rate based on the fact that they already financially established with a considerable flow of cash. Acme Consulting should have the lowest based on the fact that they are only projecting low profit margins from year to year.
Acme Consulting should have the lowest discount rate for several reasons. First of all it has the lowest projected profit margin for year 1. Acme also has the lowest projected net profit percentages for the first three years. The proof is laid out in the financial plan: Net profit year 1= $1,939
Net profit year 2= $42,615 Net profit year 3= $65,340 Net profit/sales year 1= 0.33% Net profit/sales year 2= 4.87% Net profit/sales year 3= 5.94%
Interstate Travel Center falls some where in the middle. Interstate has higher projected profit margins than Acme for all three years. Interstate also has the highest profit/sales percentages for all three years: Net profit year 1= $660,131 Net profit year 2= $$709,578 Net profit year 3= $726,520 Net profit/sales year 1= 8.05% Net profit/sales year 2= 8.25% Net profit/sales year 3= 8.05%
Silvera and Sons should have the highest discount rate because it is an already and established organization. Silvera and Sons has the highest projected profit margins of all three organizations. Silvera and Sons also has higher projected profit/sales percentages than Acme Consulting for all three years: Net...