Question
Jenny Jinglebell has always wished to own her own French macaroons shop. Ever since she tried her first macaroon, she thought it would be a
Jenny Jinglebell has always wished to own her own French macaroons shop. Ever since she tried
her first macaroon, she thought it would be a brilliant idea to have her own shop where she can
sell a multitude of flavors and colors of French macaroons. She purchased a premium site for
the macaroons shop, right across the street from Campus Martius Park in Downtown Detroit.
After extensive research, Jenny decided that it is best for her to open a franchise at first. The
franchise that best fit Jenny's criteria is Franois Patisserie. A Franois Patisserie franchise costs
$30,000, an amount that is amortized over 15 years. As a franchisee, Jenny needs to adhere to
the company's building specifications. The building would cost an estimated $450,000 and
would result in a $50,000 salvage value at the end of its 15-year life. The equipment needed is
sold as a package by the corporate office at a cost of $200,000, will have a salvage value of
$10,000 at the end of its 5-year life, equipment and must be replaced every 5 years.
Jenny estimates the annual revenue from a Franois Patisserie franchise at $950,000. Food
costs typically run 36% of revenue. Annual operating expenses, not including depreciation, total
$425,000. For financial reporting purposes, Jenny will use straight-line depreciation and
amortization. Based on past experience, she uses a 16% discount rate.
Required:
a.
Calculate the shop's net present value over the franchise's 15-year life.
b.
Calculate the restaurant's payback period.
c.
Calculate the restaurant's simple rate of return.
d.
Should Jenny open a Franois Patisserie? Why or why not? Note: for comparisonpurposes, you should know that using Excel or a similar spreadsheet application Jennycalculates her IRR to be 22.64%.
e.
What potential shortcomings do you see in Jenny's estimates? How do you recommend she
adjusts her analysis to address those shortcomings?
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