You have just graduated from the finance program of a large university, and one of your favorite courses was Todays Entrepreneurs. In fact, you enjoyed it so much you have decided you want to be your own boss. While you were in the program, your grandfather died and left you $1 million to do with as you please. You are not an inventor, 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 10 years. After 10 years, you will go on to something else. You have narrowed your selection down to two choices: (1) Franchise L, Lisas Soups, Sal- ads, & Stuff, and (2) Franchise S, Sams Fabulous Fried Chicken. The net cash flows shown below include the price you would receive for selling the franchise in Year 10 and the forecast of how each franchise will do over the 10-year period. Franchise Ls cash flows will start off slowly but will increase rather quickly as people become more health-conscious, while Franchise Ss cash flows 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.

A,B

have risk characteristics that require a return of 10%.
	A	B
0	$100	-100
1	10	60
2	15	54
3	20	48
4	25	42
5	30	36
6	35	30
7	40	24
8	45	18
9	50	12
10	55	6

(1) Define the term accounting rate of return (ARR). What is each franchises ARR?

(2) What is the rationale behind the ARR method? What assumptions are made? According to the ARR, which franchise or franchises should be accepted if they are independent? Mutually exclusive?

(3) Would the ARRs change if the cost of capital changed?