d) 1) Define the term internal rate of return (IRR). What is each franchises IRR? (2) How is the IRR on a project related to the YTM on a bond? For example, suppose the initial cost of a project is $100 and it has cash flows of $40 each year in Years 1, 2, and 3. What is its IRR? Use the Excel RATE function as though the project were a bond. (3) What is the logic behind the IRR method? According to IRR, which franchises should be accepted if they are independent? Mutually exclusive? (4) Would the franchises IRRs change if the cost of capital changed?

e) (1) Draw NPV profiles for Franchises L and S. At what discount rate do the profiles cross? (2) Look at your NPV profile graph without referring to the actual NPVs and IRRs. Which franchise or franchises should be accepted if they are independent? Mutually exclusive? Explain. Are your answers correct at any cost of capital less than 23.6%?