Kay is considering investing in a franchise, which will require an initial outlay of $100,000. She has conducted market research and found that her after-tax cash flow from this investment should be about $20,000 a year for the next seven years.

The franchisor stated that she would generate a 20% rate of return. She currently has her money in a mutual fund, which has grown at an average rate of 14 percent.

Kay tells the franchisor that, since money has a time value, the actual rate of return according to her calculations would be much less than 20 percent.

1. Do you agree with the franchisor or with Kay? Explain
2. What methods are being used by Kay and the franchisor to calculate the rate of return?

what methods are being used to calcukate the rate of return?