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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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