Mini Case:

You have just graduated from the MBA program of a large university, and one of your favorite courses was "Today's Entrepreneurs." In fact, you enjoyed it so much you have decided you want to "be your own boss." While you were in the master's program, your grandfather died and left you $300,000 to do with as you please. You are not an inventor, and you do not have a trade skill, which you can market; however, you have decided that you would like to purchase at least one established franchise in the fast foods area, maybe two (if profitable). The problem is that you have never been one to stay with any project for too long, so you figure that your time frame is three years. After three years you will sell off your investment and go on to something else.

You have narrowed your selection down to two choices (1) Franchise L: Lisa's Soups, Salads, & Stuff and (2) Franchise S: Sam's Wonderful Fried Chicken. The net cash flows shown below include the price you would receive for selling the franchise in Year 3 and the forecast of how each franchise will do over the three-year period. Franchise L's cash flows will start off slowly but will increase rather quickly as people become more health conscious and avoid fried foods. Franchise L serves breakfast and lunch, while Franchise S serves only dinner, so it is possible for you to invest in both franchises. You see these franchises as perfect complements to one another: you could attract both the lunch and dinner crowds and the health conscious and not so health conscious crowds without the franchises' directly competing against one another.

Here are the net cash flows (in thousands of dollars):

Expected Net Cash Flow

YearProject LProject S

0($150)($150)

1 15 105

29075

3 12030

Depreciation, net working capital requirements, and tax effects are all included in these cash flows.

You also have made subjective risk assessments of each franchise's risk characteristics, and you have concluded that both projects require areturn of 10 percent. You must now determine whether one or both of the projects should be accepted.

QUESTION: Defind the term modified IRR (MIRR). Find the MIRRs for Franchises L and S