Chat G59 fx K B D E F G H 3 Chapter 11 - Capital Budgeting 4. 5 Minicase 6 7 James Polk Hospital has currently unused space in its lobby. In three years, the space will be required for 8 a planned expansion, but the hospital is considering uses of the space until then. The hospital has decided 9 that it wants to purchase at least one and maybe two fast food franchises, to take advantage of the high 10 volume of patients and visitors that walk through the lobby all day long. The hospital plans to purchase 11 the franchise(s), operate them for three years, and then close them down. The hospital has narrowed its 12 selection down to two choices: 13 14 Franchise L:Lisa's Soups, Salads, and Stuff 15 Franchise S: Sam's Wonderful Fried Chicken 16 17 The net cash flows shown below include the costs of closing down the franchises in Year and the forecast 18 of how each franchise will do over the three-year period. Franchise L serves breakfast and lunch, while 19 Franchise S serves only dinner, so it is possible for the hospital to invest in both franchises. The hospital 20 believes these franchises are perfect complements to one another. The hospital could attract both the 21 breakfast/lunch and dinner crowds and both the health-conscious and not-so-health-conscious crowds without the 22 franchises directly competing against one another. The corporate cost of capital is 10 percent. + 23 24 Net cash flows Franchise Franchise 25 Year S L 26 0 -S100 -S100 27 1 $10 28 2 $50 S60 29 30 31 a. Calculate each franchise's payback period, net present value (NPV), Internal rate of return (IRR) and 32 modified internal rate of return (MIRR). 33 b. Graph the NPV of each franchise at different values of the corporate cost of capital from 0 to 24 percent in 34 2 percent increments, -35 - How sensitive are the franchise NPVs to the corporate cost of capital? 36 - Why do the franchise NPVs differ in their sensitivity to the corporate cost of capital? 37 - At what cost of capital does each franchise intersect the X-axis? What are these vales! 38 e. Which project or projects should be accepted if they are independent? Which project should be accepted If 39 they are mutually exclusive! 40 d. Suppose the hospital could sell of the equipment for each franchise at the end of any year. Use NPV to 41 determine the optimal economic life of each franchise when the salvage values are as follows: 42 43 Salvage value Franchise Franchise Year 1 45 S100 $100 46 S60 570 47 2 520 5:30 48 3 SO 50 49 50 ANSWER $70 520 $80 0 1 51
