Can I get a clear answer on 4th part please asap and in a explained way
Inca, Inc. Inca, Inc., operated and licensed others included a pickup window for driveto operate quick-service restaurants under through service. the name Pedro's. The menu featured Locations were chosen in heavily chiliburgers, along with a limited selection populated areas, since success depended of Mexican foods. The walls of each upon serving a large number of customers. restaurant were decorated with the exploits All of the restaurants offered the same of Mexican heroes. menu. Three sizes of chiliburgers were The first Pedro's was opened in featured: the Gaucho (quarter pound), the Victoria, British Columbia , ten years Soldado (half pound), and the Matador ago. Now there were 298 restaurants in (three-quarter pound). The names were operation in across the country and in integrated into the company's advertising. some northern states, of which 111 were On television each commercial gave special operated by the company and 187 by attention to one of the three themes. franchisees. In addition, 4 restaurants The prospective franchisee signed a were under construction by the company, document that included the option of and 64 by franchisees. A balance sheet as operating a specified number of Pedro's of June 30, 20XX, is given as Figure 1. restaurants in a prescribed geographical Each Pedro's restaurant was built to the area. Each new location required an initial same specifications for exterior style and payment of $18,000. In addition, a royalty interior dcor. The buildings, constructed of 5 percent of gross sales was specified. It of yellow brick, were located on sites of was also stipulated that franchisees must approximately one acre. The parking lots, spend at least 2 percent of gross receipts on depending on the exact size and shape of local advertising. Inca, Inc., believed that the land, were designed for 30 to 35 cars. properly trained employees were the key to The standard restaurant contained about success. Therefore, managers and 1,900 square feet, seated 81 persons, and company trainees were required to attend a three-week propram covering all aspects of company operations. More than 600 people were graduated from the school four years ago. Inca, Inc., planned to begin construction on five new company-owned restaurants Management believed that restaurants with a capacity of 144 persons would be more profitable than the present size of 81 . The company faced two choices: contimuing with the smaller-size units or going to the larget size. The initial cost for five smaller restaurants was $2.1 million, and it was $3.7 million for five larger ones. Demand expectations over the years were 40 percent for high demand, 40 percent for medium demand, and 20 perceat for low demand. The net preseat values of cash flows for the two proposals are given in Figure 2 . Jolun H. Porter had been president and chief executive officer of Inca, Inc., for 8 years. Prior to that time, he had worked for a competitor. He knew the decision concerning the size of new restaurants could be a major turning point for the company. Mr. Porter wondered if the potential higher retums for the larger units justified the increased risk. In any event, the strategy would have to be sold to the board of directors. INCA, INC. Present Value of Cash Flows (in thousands)
