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.

d. (1) What is each franchises IRR?

(2)How is the IRR on a project related to the YTM on a bond? For example, suppose the initial cost of a project is $100 and it has cash f lows of $40 each year at Years 1, 2, and 3. What is its IRR? Use the Excel RATE function as though the project were a bond

(3)What is the logic behind the IRR method? According to IRR, which franchises should be accepted if they are independent? Mutually exclusive?

g.Define the term modified IRR (MIRR). Find the MIRRs for Franchises L and S.

h.What does the profitability index (PI) measure? What are the PIs of Franchises S and L?

i.(1)What is the payback period? Find the paybacks for Franchises L and S.

(2)What is the rationale for the payback method? According to the payback crite-rion, which franchise or franchises should be accepted if the firms maximum acceptable payback is 2 years and if Franchises L and S are independent? If they are mutually exclusive?

(3)What is the difference between the regular and discounted payback periods?

(4)What is the main disadvantage of discounted payback? Is the payback method of any real usefulness in capital budgeting decisions?"