Klinger’s Toledo Inn has achieved moderate success for the past 5 years. It had an ADR this past year of $60 and paid occupancy of 60%. He wonders if his rooms-only lodging facility with 100 rooms might do even better if it was part of a franchised system. The William Harris Lodging Chain (WHLC) salesman suggests that his hotel would benefit from a franchise with the WHLC for a 10-year period.

Through careful study, M. Klinger has gathered the following information:
1. The initial fee with WHLC of $60,000 must be paid at the signing of the franchise agreement. For tax purposes, the initial fee would be amortized over a 10-year period on a straightline basis.
2. The paid occupancy percentage is expected to increase by 4 percentage points, and the ADR is expected to increase $4 per room due to this association.
3. Advertising and royalty fees to be paid to WHLC would be 2% of total gross room sales plus $1,000 per month.
4. The reservation fee would be $5 for each reservation through the WHLC system. Assume 20% of the rooms sold are expected to come through the WHLLC reservation system.
5. Assume the variable costs other than those mentioned above are 10% of gross room sales, and that annual fixed costs, other than the amortization of the initial fee, would increase by $10,000.
6. Assume a marginal tax rate of 30% for the Toledo Inn.
7. Assume the Toledo Inn’s cost of capital is 10%.
Required:
1. Prepare a financial analysis based on the above information for the 10-year period. Determine the net present value of cash flows. (Consider only differential revenues and expenses.)
2. Should M. Klinger sign with WHLC? Yes or No? Explain your position!