"MINI CASEYou have just graduated from the MBA program of a large university, and one of yourfavorite courses wasTodays Entrepreneurs.In fact, you enjoyed it so much you havedecided you want tobe your own boss.While you were in the masters program, yourgrandfather 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 youwould 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 fortoo long, so you figure that your time frame is 3 years. After 3 years you will go on tosomething else.You have narrowed your selection down to two choices: (1) Franchise L, Lisas Soups,Salads, & Stuff, and (2) Franchise S, Sams Fabulous Fried Chicken. The net cash flowsshown below include the price you would receive for selling the franchise in Year 3 andthe forecast of how each franchise will do over the 3-year period. Franchise Ls cash flowswill start off slowly but will increase rather quickly as people become more health-conscious, while Franchise Ss cash flows will start off high but will trail off as otherchicken competitors enter the marketplace and as people become more health-consciousand avoid fried foods. Franchise L serves breakfast and lunch whereas Franchise S servesonly dinner, so it is possible for you to invest in both franchises. You see these franchisesas perfect complements to one another: You could attract both the lunch and dinnercrowds and the health-conscious and not-so-health-conscious crowds without the fran-chises directly competing against one another.Here are the net cash flows (in thousands of dollars):Expected Net Cash FlowsYearFranchise LFranchise S0$100$100110702605038020Depreciation, salvage values, net working capital requirements, and tax effects are allincluded in these cash flows.You also have made subjective risk assessments of each franchise and concluded thatboth franchises have risk characteristics that require a return of 10%. You must nowdetermine whether one or both of the franchises should be accepted

1. Define the term internal rate of return (IRR). What is each franchises IRR?
   1. How is the IRR on a project related to the YTM on a bond?
   2. What is the logic behind the IRR method? According to IRR, which franchises should be accepted if they are independent? Mutually exclusive?
   3. Would the franchises IRRs change if the cost of capital changed?