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 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:
1. Calculate the shops net present value over the franchises 15-year life.
2. Calculate the restaurants payback period.
3. Calculate the restaurants simple rate of return.
4. 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%.
5. What potential shortcomings do you see in Jennys estimates? How do you recommend she adjusts her analysis to address those shortcomings?
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