You have just graduated from the MBA program of a large university, and one of your favorite courses was "Today's Entrepreneurs." In fact, you enjoyed it so much you have decided you want to "be your own boss." While you were in the master's program, your grandfather died and left you $1million 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 purcahse 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, Lisa's Soups, Salads and Stuff, and 2.) Franchise S, Sam's Fabulous Fried chicken. 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 3-year period. Franchise L's cash flows will start off slowly but will increase rather quickly as peiople become more health-concious, while Franchise S's cash flows will start off high but will trail off as other chicken competitors enter the marketplace and as people become more health-concious and avoid fried foods. Franchise L serves breakfast and lunch wereas Franchise S serves only dinner, so it is possibly 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-concious and not-so-health concious crowds without the franchises directly competing against one another. Here are the next cash flows (in thousands of dollars) Franchise L Franchise S Year 0 -100 -100 Year 1 10 70 Year 2 60 50 Year 3 80 20 Depreciation, salvage values, net working capital requirements, and tax effects are all included in these cash flows. You also have made sbjective risk assessments of each franchise and concluded that both franchises have risk characteristics that require a return of 10%. C. 1.What is each franchise's NPV? 3. Would the NPVs change if the cost of cpital changed? D. 2. How is the IRR on a project related to the YTM on a bond? 3. What is the logic behind the IRR method? According to IRR, which franchises should be accepted if they are indepedent? Mututally exclusive? 4. Would the franchises' IRRs change if the cost of cpital changed? F. 1. What is the underlying cause of ranking conflicts between NPV and IRR? g. 1. Find the MIRRs for Franchises L and S. 2. What are the MIRR's advantages and disadvantages vis-a-vis the NPV? h. What are the PI's of Franchise L and S? i. What is the payback period for Franchise L and S? 2. According to the payback criterion, which franchise or franchises should be accepted if the firm's maximum acceptable payback is 2 years and if Franchises L and S are indepedent? If they are mutually excluse? L. You are also considering another project that has a physical life of 3 years; that is, the machinery will be totally worn out after 3 years. However, if the project were terminated prior to the end of the 3 years, the machinery would have a positive salvage value. Here are the project's estimated cash flows Year Initial Investment and Operating Cash Flows End-of-year net salvage value 0 -5000 5000 1 2100 3100 2 2000 2000 3 1750 0 using the 10% cost of capital, what is the project's NPV if it is operated for the full 3 years? Would the NPV change if the company planned to terminate the project at the end of Year 2? At the end of Year 1? What is the project's optimal (economic) life? M. After examining all the potential projects, you discover there are many more projects this year with a positive NPVs than in a normal year. What two porblems might this extra-large capital budget cause