During a Fogelman MBA alumni dinner in $10$ years your classmate approaches you about

investing in the local restaurant chain $$Dewey$$s$$ and gives you the pertinent cash flow

estimations. He suggests you buy a building and franchise, for a total initial cash outflow of $$3\mathrm{.}5$

million. He projects this will yield positive cash flows of $$200,000$ per year for $5$ years, plus a

building worth $$3\mathrm{.}8$ million in year $5.$

a$.$ Assuming you have all requisite money to invest, if you demand a $9\%$ return to take on the risk

of this investment, would you accept his offer? Compute NPV and IRR to justify your answer.

A few weeks later, you receive a follow$-$up email from your fellow alumnus stating that he$$s found

two restaurant spaces to lease, rather than buy. The smaller space only requires an initial cash

outflow of $$350,000$ for a down payment and franchise fee and would yield annual cash flows of

$$100,000($after lease payments$)$ for $5$ years. The bigger space requires a bigger down payment

but yields higher annual cash flows of $$140,000$ for $5$ years. So projected cash flows are as follows:

CF $($$$1,000$s$)$

Year Purchase Small Lease Big Lease

$0-3,500-350-500$

$1200100140$

$2200100140$

$3200100140$

$4200100140$

$54,000100140$

b$.$ Assuming the same $9\%$ cost of capital, calculate and report the NPV$,$ IRR, Payback, and

Profitability index for both projects. Use these calculations to answer the following questions:

c$.$ If only the small restaurant is available, would you invest? If only the big restaurant is available,

would you invest? If your classmate offered you both restaurant opportunities, would you

invest in both? If you had to choose between the small and the big restaurant, which would you

choose and why?

d$.$ If your required return on this investment was $11\%,$ which investment would you choose and

why?

e$.$ Now consider your profitability index calculations $($with the $9\%$ WACC$).$ Do your answers in

Part $($C$)$ change if there are multiple $$small$$ and multiple $$big$$ locations available for your

investment $($and you have the capital to invest$)?$ i$.$e$.$ you can invest in $2$ or more $$small lease$$

projects.