Part A. You goal is to perform an NPV & investment criteria analysis of a Tim Hortons franchise in NS. Assume $500,000 in annual sales in year 1 growing linearly to $1,500,000 in sales in year 5 and staying flat after that, build a sales-driven model. You will have to construct a hypothetical income statement and estimate cash flows generated by the business.

After you perform NPV analysis, internal rate of return, estimate payback, discounted payback, profitability ratio.

Assumptions[1]:

• further, the following information was gathered from Tim Hortons website regarding costs of starting a franchise in Canada:
• royalty fee of 4.5% of gross sales
• rental fee: your rental fee is 170,000. Assume that this is fixed cost that does not vary with sales
• advertising fee of 4% of gross sales
• working capital investment of $50,000 and equipment purchase is $450,000
• at least two partners; assume annual salary of $40,000 per partner.

Further, more data was collected from other sources:

• assume cost of goods sold of 60% of gross sales
• assume straight-line depreciation of 10% of total investment on equipment purchase of $450,000
• corporate tax rate is 15.5%. Losses, if any, are tax deductible over 20-year period[2]

Additional cost of capital assumptions:

• assume cost of debt of 7%
• cost of equity is estimated using yield-plus-risk-premium approach; use historical or implied equity risk premium
• debt-to-equity ratio equals one (1.0)

You may use template on the next page for your estimates. Note: I built an excel worksheet with four tabs assumptions, NPV & other investment criteria, NPV under inflation, and tax loss carryforwards.

Part B. Perform NPV analysis only, assuming inflation rate of 4% a year. Note that some of your entries from part A will be affected by inflation directly, some other through sales, and yet the third category will remain unaffected.