Question
After being fired from Trident Inc. your friend Nunzio was having a difficult time finding employment. He wished he had been a better student by
After being fired from Trident Inc. your friend Nunzio was having a difficult time finding
employment. He wished he had been a better student by attending all his classes and not
cheating on his exams and learning activities. He knows that you have a strong work ethic and are a good business person as you obtained your
BBA from Yorkville University and always behaved ethically throughout your studies.
He wants to go into partnership with you by opening a franchise and asked you for help in
performing an analysis.
The opportunity involves a coffee shop franchise. Which will require a $650,000 buy in. Typical
annual operating costs will be $200,000 (cash) and that the forecasted revenues will be $310,000
per year. The Franchisor demands a payment of 12% of Revenues for trademark and business
model. You would like to earn at least 8% on this investment and will need to borrow the entire
buy-in amount at an interest rate cost of 4%. You plan to conduct your analysis over a 15-year
period and will not consider taxes at this time.
Required
1. Find the NPV and IRR of this investment, given the information above.
2. You are skeptical of Nunzio's revenue forecast of $310,000 per year. He did take Math in
school and achieved a grade of 95%, however he never attended any classes and was only able to
achieve this remarkable grade by plagiarizing from a classmate. You believe that a more
realistic revenue forecast will be lower. Conduct a sensitivity analysis by finding the NPV and
IRR (similar to Part 1 above) of this investment using $280,000 and $260,000 as the revenue
forecast.
3. You believe that you can negotiate a lower payment to the franchisor and also think that if
revenues are lower than $310,000 costs will decrease by $20,000. Repeat the same analysis as
you did in Part 2 above (using $280,000 and $260,000 forecasted revenue) with annual operating
costs of $180,000 and Franchise fee of 9% of revenues
4. Discuss how the sensitivity analysis will affect your decision to buy the franchise. Why don't you have to recalculate the IRR if you change the desired (discount) interest rate?
5. As a franchisor you are required to pay a percentage of your revenue in fees. From a management accountant perspective, what opportunities are available to minimize if not reduce
these fees?
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