Youve recently won $500,000 in a lottery. It has always been a dream of yours to own a restaurant After completing a lot of research both online and at franchise shows, you have narrowed your choices down to two franchises. Each franchise sells only one meal combo and both franchises are located in the same town. Each franchise agreement will give you the right to operate the franchise for a 10 year period. You will be required to lease a building and to pay for any necessary leasehold improvements to the building. At the end of 10 years the franchise will revert back to the parent corporation. Both franchises allow you to keep any profit you make from the franchise over the 10 year period. In addition to the initial franchise fee, you are required to make royalty payments to the parent corporation for every meal combo you sell. Your company will depreciate the leasehold improvements and the franchise fee using the straight-line method, there is no residual value expected on either asset at the end of ten years. The Upper Canada Bank has offered you a loan to cover any cash shortfall between your lottery winnings and any cash you have to come up with to pay for the franchise fees and leasehold improvements. The arrangement for the Upper Canada Bank loan is that interest only will have to be paid on any funds borrowed at a rate of 8% annually. In ten years when the franchise expires you will be required to pay back the loan principal with a lump sum payment.

Required:

A. The next page of this assignment contains all of the information you will need to complete this part of the assignment.

B. Locate the Excel Spreadsheets titled Group Project Template. This template will contain your groups solution to the problems and must be uploaded in D2L drop box by the due date.

1. Calculate the breakeven volume of sales in units and in dollars for both alternatives (30 marks)

2. Calculate the breakeven volume of sales in units and in dollars for each franchise if your goal is to realize a profit of $100,000 in the first year of operations. (3 marks)

3. Identify the alternatives that have the highest and lowest risk and explain why. (3 marks)

4. Prepare a contribution margin format income statement showing the $100,000 profit. (7 marks)

5. Based on the financial information that you have prepared, explain which franchise you would choose to invest in? Give at least two reasons for your selection. (2 marks)

6. Excel formulas used for all calculations in question 1. (5 marks)