You are asked to analyse the following two projects: (1) Franchise L and (2) Franchise S. The net cash flows shown below include the price you would receive for selling the franchise in Year 3 and the forecast of how each franchise will do over the three-year period. Here are the net cash flows (in thousands of pounds): Expected Net Cash Flows Year Franchise L Franchise S.

You are asked to analyse the following two projects: (1) Franchise L and (2) Franchise S. The net cash flows shown below include the price you would receive for selling the franchise in Year 3 and the forecast of how each franchise will do over the three-year period.

Here are the net cash flows (in thousands of pounds):

Expected Net Cash Flows

Year Franchise L Franchise S

0 (110) (110)

1 20 70

2 30 55

3 80 25

Depreciation, salvage values, net working capital requirements, and tax effects are all included in these cash flows.

You have also made subjective risk assessments of each franchise and concluded that both franchises have risk characteristics that require a return of 10%. You must now determine whether one or both franchises should be accepted.

a. Calculate ARR (Accounting Rate of Return), payback period, NPV (Net Present Value), and IRR (Internal Rate of Return) for each project.

b. Determine whether one or both of the franchises should be accepted, if each project is independent from each other, or if the projects are mutually exclusive based on your calculations in (a) above.