This problem is a continuation of Problem 16.7

. Assume additional annual costs (other than those addressed in Problem 16.7

) for the two franchise options as follows:

Dr. Taco Taco Ring Labor costs* 22% 24%

Supplies* 5% 5%

Food costs* 20% 19%

Other variable costs* 8% 7%

Fixed costs (annual) $40,000 $35,000 Income tax rate 15% 15%

*As a percent of total sales.

Assume Rudy Escobar’s required cost of capital is 10%. Further assume $100,000 would be spent on furniture and fixtures regardless of the franchise. These costs would be depreciated over a 5-year period using the straight-line method. Assume zero salvage value.

Required:

1. Determine the net present value for each franchise option.

2. Which franchise should Rudy Escobar select? Why?