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 Jennys 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 companys 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 Patisseriefranchise 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 shops net present value over the franchises 15-year life. b. Calculate the restaurants payback period. c. Calculate the restaurants simple rate of return. d. Should Jenny open a Franois Patisserie? Why or why not?Note: for comparison purposes, you should know that using Excel or a similar spreadsheet application Jenny calculates her IRR to be 22.64%. e. What potential shortcomings do you see in Jennys estimates? How do you recommend she adjusts her analysis to address those shortcomings?
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 Jennys 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 companys 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 Patisseriefranchise 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:
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