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A business is considering investing in a franchise, which will require an initial outlay of 100,000. As the Assistant to the financial manager, you have
A business is considering investing in a franchise, which will require an initial outlay of 100,000. As the Assistant to the financial manager, you have conducted market research and found that the after tax cash flows on this investment should be about 20,000 a year for the next seven years. The franchiser stated that the business will generate a 20 percent rate of return. Currently the cash flow could generate if placed in a mutual fund an average growth rate of 14 percent. You explained to the franchiser that money has a time value and the actual rate of return according to their calculations is much less than 20 percent. 1) Explain with some calculations the time value of money to the franchiser. 2) What rate of return is the franchiser using and what method did you use for your calculations? 3) Should your business make the investment? Explain your
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