Question
Assume you are considering two different franchise opportunities to invest in. Option 1 is a Dairy Queen and Option 2 is a Burger King. The
Assume you are considering two different franchise opportunities to invest in. Option 1 is a Dairy Queen and Option 2 is a Burger King. The following data is given to you by the two chains so that you can decide which investment to make. Assume for either choice that your Required Return is 10% and that after 6 years the business will cease operations.
Option 1 (Dairy Queen)
Initial Investment: $300,000
Cash Flows:
Year | 1 | 2 | 3 | 4 | 5 | 6 |
$25,000 | $50,000 | $100,000 | $125,000 | $100,000 | $50,000 |
Option 2 (Burger King)
Initial Investment: $500,000
Cash Flows:
Year | 1 | 2 | 3 | 4 | 5 | 6 |
$75,000 | $75,000 | $100,000 | $150,000 | $150,000 | $150,000 |
Questions:
1. What is the Net Present Value for each option?
2. What is the Internal Rate of Return for each option?
3. Which option would you choose? Why? (Use the numbers to answer this!)
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