Mini Case You have just graduated with a business degree from a large university , and one of your favourite courses was" Today's Entrepreneurs ." In fact , you enjoyed it 50 much you have decided you want to" be your own boss ." While you were studying. your grandfather died and left you $ 1 million to do with as you please . You are not an inventor , and you do not have a trade skill that you can market ; however , you have decided that you would like to purchase at least one Established franchise in the fast- food area, maybe two ( if profitable ] . The problem is that you have never been one to stay with any project for too long , 50 you figure that your time frame Is 3 years . After ] years you will 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 5. Sam's Fabulous Filled Chicken . The net cash flows shown below include the price you would receive for selling the Franchise in Year ] and the forecast of how each franchise will do over the 3- year* period . Franchise L's cash flows will start off slowly but will increase rather quickly as people become more health conscious , while Franchise S's cash flows will start off high, but will trail off as other chicken competitors enter the* marketplace and as people become more health conscious and avoid fried foods. Franchise LEEIVES breakfast and Lunch , while Franchise S SERVES Only dinner , ED it is possible for you to Invest in both franchises . You see these franchises as` FElfect complements to each other . You could attract both the lunch and dinner crowds and the health - conscious and not so health - conscious crowd's without the franchises directly competing against Each other .Discount Rate = Required rate of return = 10^ EXPECTEd Net Cash Flow Year Franchise L Franchise 5 - 100 - 10 0 1 10 5 5 2 50 20 Decision if Independent Decision if Mutually* Projects Exclusive projects a ) Calculate* NPV = 518. 78 $15. 4 4 Choose Franchise L Choose Franchise L NPV'L = NPV'S IRR = 18. 13:36 20.35 *` Choose Franchise 5 Choose Franchise 5 IFRS = IRBIL MIRA 15. 50^` 15 . 39*` Choose Franchise L Choose Franchise L MIRAL = MIRRS Explain the difference between MIRR and JAR. and when you would use MIRR . WHIRR is more accurate and measures the true return rate . IRR Excludes outside factors . bij Find the payback and discount payback periods for these projects Franchise L Franchise 5 D 1 2 } - 10 0 10 B.D` - 100 5.5 50 20 Cumulative CF Cumulative CF Payback Period YEARS Payback Period YEARS Franchise L 1 2 Franchise 5 1 2 3 100 10 ED -10 0 5.5 50 20 FY' OF CF - 100 PV OF OF - 100 Cumulative CF Cumulative CF Discounted Payback Period \years Discounted Payback Period YEARSWhat is the Usefulness of the payback and discounted payback; methods ? Are Either of them useful for project decision making ? [ ) Find the Crossover Point Step is Calculate the difference* between Franchise L & 5 Cashflows In Step lil Find the Crossover rate for these Cashflow Differences Crossover Hate = Explain what a crossover rate is . ") In an unrelated analysis , you have the opportunity to choose between the following two mutually exclusive projects . Discount rate = 10^ Year Project*` Project " |100,000 ) |100,0001 1 50, 000 33, 000 EQ, OOD 33,000 33, 000 33, 000 Mutually Exclusive* Decision Calculate NPV = EAA =