Montgomery Hospital has an empty space in its lobby that is currently unused. However, this space will be

needed for a planned expansion in three years. To make good use of the space until then, the hospital is

considering opening one or two fast food franchises. The hospital is attracted to this idea because of the high

volume of patients and visitors who walk through the lobby every day. This presents a potentially profitable

opportunity. However, it is important to note that the hospital only plans to operate the franchises for three

years before closing them down. The hospital has narrowed its selection down to two choices: Franchise $L$

$($Larson$\text{'}$s Soups, Salads, and Stuff$)$ and Franchise S $($Sue$\text{'}$s Wonderful Fried Chicken$)$

The provided net cash flows consider two factors: $1)$ the estimated costs of closing both franchises

after three years, and $2)$ the projected financial performance of each franchise during that period. While

Franchise $L$ specializes in breakfast and lunch, Franchise $S$ focuses solely on dinner. This allows the hospital

to potentially invest in both, catering to different audiences throughout the day. The hospital sees these

franchises as ideal complements because: $1)$ they attract separate customer segments breakfast$/$lunch vs$.$

dinner, and $2)$ they cater to both health$-$conscious and less health$-$conscious individuals. This combination

minimizes direct competition between the two within the hospital setting. The corporate cost of capital is $10$

percent.

For this case analysis, you need to show the solution process using financial calculator keys for full credit.

Showing the excel sheet you used, except the NPV graph in part b$,$ will not be considered in the grading

process. $($Financial Calculator Keystroke Example: $N=1,IV=10,PV=100,PMT=0,CPTFFV=110$;$CF0=0,01$

$=110,F01=1,NPV,I=10,CPTNPV=100.)$

a$.$ Calculate each franchise's payback period, net present value $($NPV$),$ internal rate of return $($IRR$),$ and

modified internal rate of return $($MIRR$).$

b$.$ Create a table where you calculate NPV of each franchise at different values of the corporate cost of

capital from $0$ to $24$ percent in $2$ percent increments. In the table, the first column would be different values

of cost of capital, the second column would have Franchise S$\text{'}$ NPVs at different values of the corporate

cost of capital, and the third column would have Franchise L$\text{'}$ NPVs at different values of the corporate cost

of capital. Once the table is created, graph $($sketch$)$ it using cost of capital as X variable and each

Franchise's NPV as y variable. $($The graph can be created in excel and copy$/$paste to the word file you

submit but not required.$)$ Then based on the table and the graph you created, answer the following

questions:

How sensitive are the franchise NPVs to the corporate cost of capital?

Why do the franchise NPVs differ in their sensitivity to the corporate cost of capital?

$-$At what cost of capital does each franchise intersect the X$-$axis? What are these values?

c$.$ Which project or projects should be accepted if they are independent? Which project should be

accepted if they are mutually exclusive?