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Capital Budgeting - 25 points You have decided that you would like to purchase at least one established franchise in the fast- foods area, maybe
Capital Budgeting - 25 points You have decided that you would like to purchase at least one established franchise in the fast- foods area, maybe two (if profitable). You figure that your time frame is six years. After six years you will sell off your investment and go on to something else. You have narrowed your selection down to two choices; (1) Franchise A, Abdallah's Soups, Salads, & Stuff and (2) Franchise B, Bohua's Fabulous Fried Chicken. The net cash flows shown below include the price you would receive for selling the franchise in Year 6 and the forecast of how each franchise will do over the six-year period. Franchise A serves breakfast and lunch, while Franchise B serves only dinner, so it is possible for you to invest in both franchises. You see these franchises as perfect complements to one another: You could attract both the lunch and dinner crowds and the health conscious and not so health conscious crowds without the franchises directly competing against one another. Here are the net cash flows (CHF): a year 0 1 2 3 4 Abdullah Soups -670,000 250,000 200,000 170.000 150,000 130,000 130,000 Bohua Chicken -940,000 170.000 180,000 200,000 250,000 300,000 550,000 5 6 Depreciation, salvage values, net working capital requirements, tax effects, and all other relevant components, are all included in these cash flows. You also have made subjective risk assessments of each franchise, and concluded that both franchises have risk characteristics that require a return of 11%. You must now determine whether one or both of the franchises should be accepted. 1. What is each franchise's Net Present Value (NPV)? 5 points A. According to NPV, which franchise or franchises should be accepted if they are independent? B. According to NPV, which franchise or franchises should be accepted if they are mutually exclusive
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