THE CASE: Guthrie's restaurant was started in 1965 in Haleyville, Alabama, by Hal Guthrie. The restaurant began serving Chicken Fingers in 1978. In 1982, Hal and his oldest son Chris opened a Guthrie's in Auburn, Alabama. Originally, Guthrie's had a large menu including hamburgers, steak sandwiches, and chicken fingers. Soon after opening, however, the menu was limited to the overwhelmingly popular Chicken Finger box. The Box includes chicken fingers, French fires, cole slaw, Texas toast, and Guthrie's Signature Sauce. During the 1980s, The Guthrie family opened Guthrie's locations in several college towns throughout the Southeast, including Athens, Georgia, Tallahassee, Florida, and Tuscaloosa, Alabama. They also opened them in several other towns. By the end of the 1980s, Guthrie's was a household name throughout much of the Southeast.

Now, more than 50 years since first opening, Guthrie's continues as a specialty restaurant with a limited menu focusing on Fried Chicken Fingers. It is still a family business, but its franchise business is steadily growing. As a result, people all over the U.S. can now enjoy Guthrie's Golden Fried Chicken Fingers.

You and your business partners are considering applying for a franchise. If approved, you expect startup costs to be $1,726,800 in equipment that is depreciable on a 7-year MACRS schedule. Your plan is to start and operate the business for 8 years at the end of which time you expect to sell the business for $1,726,800 plus $300,000. You expect to have initial working capital needs of $20,000, but these needs will remain proportionate to sales (they will grow at the same rate as sales grow). You expect sales in the first year to be $350,000 and that sales will grow by 15% per year. You project annual fixed operating expenses of $95,000 in the first year. These fixed expenses will grow by 10% per year. Your annual variable operating expenses are as follows: marketing expenses will be 5% of sales, general and administrative expenses are expected to be 10% of sales, and all other operating expenses are expected to be 30% of sales.

You expect to pay taxes of 21%. Assume your required return is 13%. Should you apply for a Guthrie's Franchise? Prepare a report responding to the following prompts:

1. Prepare pro forma income statements and operating cash flow projections. Explain your pro forma statements in your report. You must use Excel (or another spreadsheet package) for your income statement and cash flow projections, and your calculations must make use of the formula and cell-reference functions within Excel.
2. Estimate the total cash flows for this opportunity. Explain your estimates in your report. Again, your calculations must be done within Excel using appropriate formulas and cell references.
3. Estimate the opportunity's NPV. Explain how you arrived at your NPV estimates in the report. Again, your calculations must be done within Excel using appropriate formulas and cell references.
4. Consider what happens to cash flows and NPV if Sales are 20% more than expected. What if sales are 20% less than expected? Discuss this analysis in your report. Your calculations must be such that you simply change one cell (to reflect the change in sales) and your spreadsheet recalculates everything.
5. What happens to your base NPV calculation if your required return is 15% rather than 13%?
6. What is your recommendation? Should you and your partners pursue this opportunity? Explain your recommendation and provide your rationale.

^*Some of this information is drawn from Guthrie's web page (guthrieschicken.com), but all the financial figures are fictional.