You have just completed your undergraduate degree, and one of your favorite courses was "Today'sEntrepreneurs." In fact, you enjoyed it so much you have decided you want to "be your own boss." Whileyou were in the program, your grandfather died and left you $250,000 to do with as you please. You arenot an inventor, and you do not have a trade skill that you can market; however, you have decided that youwould 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 yourtime frame is four years. After four years you will sell off your investment and go on to something else. Youhave narrowed your selection down to two choices; (1) Franchise 1: Fabulous Fried Chicken and (2)Franchise 2: Soups, Salads, & Stuff. The net cash flows shown below include the price you would receivefor selling the franchise in Year 4 and the forecast of how each franchise will do over the four-year period.Franchise 1's cash flows will start off high but will trail off as other chicken competitors enter the marketplaceand as people become more health conscious and avoid fried foods, while Franchise 2's cash flows willstart off slowly but will increase rather quickly as people become more health conscious. Franchise 2serves breakfast and lunch, while Franchise 1 serves only dinner, so it is possible for you to invest in both 2franchises (i.e., projects may or may not be independent). You see these franchises as perfectcomplements to one another: you could attract both the lunch and dinner crowds and the health consciousand not so health conscious crowds without the franchises' directly competing against one another. Hereare the net cash flows (in thousands of dollars):

EXPECTED NET CASH FLOWS

Year Franchise 1 Franchise 2

0 ($100) ($100)

1 90 10

2 70 50

3 50 60

4 20 80

Depreciation, salvage values, net working capital requirements, and tax effects are all included in thesecash flows.You also have made subjective risk assessments of each franchise, and concluded that both franchiseshave risk characteristics that require a return of 8 percent. You must now determine whether one or bothof the projects should be accepted.In order to do so please answer the following questions fully. Make sure to show a time line, the formula To be used, the steps taken to solve the problem (calculator or excel) and the final numerical answer when appropriate.

QUESTIONS

1. Create a time line for each of the franchises.

2. What is each franchise's NPV? Make sure to show the formula, steps and final answer.

3. Calculate the IRR for each project. Make sure to show the formula, calculator or excelsteps and final answer.

4. Find the MIRRs for Franchises 1 and 2. Make sure to show the formula, steps and finalanswer.

5. Calculate the payback period for each franchise. Make sure to show the formula, stepsand final answer.

6. Calculate the discounted payback period for each franchise. Make sure to show theformula, steps and final answer

1. Based on the results obtained using five different models state which franchise youwould ultimately choose if the projects are independent and if they are mutually exclusive (i.e.,you decide invest in both or just on one). Make sure to explain in some detail why. Please usedefinitions and do not forget to point out the advantages and disadvantages of each model.

2. In the case of mutually exclusive projects (i.e., you can only select one of the twoprojects) determine which project you would select and why.

3. With regards to question 2, assume that you need to make your decision using onlyone model, which model would you choose to make your selection and why