Question
While you were in the masters program, your grandfather died and left you $1 million to do with as you please. You are not an
While you were in the masters program, your grandfather died and left you $1 million to do with as you please. You are not an inven-tor, 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-foods area, maybe two (if profitable). The problem is that you have never been one to stay with any project for too long, so you figure that your time frame is 3 years. After 3 years you will go on to something 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 f lows that follow include the price you would receive for selling the franchise in Year 3 and the forecast of how each franchise will do over the 3-year period. Franchise Ls cash f lows will start off slowly but will increase rather quickly as peo-ple become more health-conscious, while Franchise Ss cash f lows 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 L serves breakfast and lunch, whereas Franchise S serves only dinner, so it is possible for you to invest in both franchises. You see these franchises as perfect complements to one another: You could attract both the lunch and dinner crowds and the health-conscious and not-so-health-conscious crowds without the franchises directly competing against one another"
Here are the net cash flows (in thousands of dollars):
year | Franchise L | Franchise S |
0 | -$100 | -$100 |
1 | 10 | 70 |
2 | 60 | 50 |
3 | 80 | 20 |
Depreciation, salvage values, net working capital requirements, and tax effects are all included in these cash f lows.You also have made subjective risk assessments of each franchise and concluded that both franchises have risk characteristics that require a return of 10%. You must now de-termine whether one or both of the franchises should be accepted.
1. Please show step by step work (not in excel)
(a) What is each franchises IRR?
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