Saturday

April 19, 2014

April 19, 2014

Posted by **kelly** on Tuesday, November 15, 2011 at 10:43pm.

Year Franchise L Franchise S

0 $100 $100

1 $ 10 $ 70

2 $ 60 $ 50

3 $ 80 $ 20

Depreciation, salvage values, net working capital requirements, and tax effects are included in the cash flows. The required rate of return is 10%. You must decide which franchise to invest in.

Procedure

1. What is each franchise's NPV? Be sure to show your calculations.

2. According to the NPV, which franchise or franchises should be accepted if they are independent? Which should be accepted if they are mutually exclusive?

3. Would the NPV change if the cost of capital changed?

4. What is each franchise's IRR? Be sure to show your calculations.

5. What is the logic behind the IRR method? According to the IRR, which franchises should be accepted if they are independent? Mutually exclusive?

6. Would the franchises' IRR change if the cost of capital changed?

7. Draw the NPV profiles for each franchise. At what discount rate do the profiles cross?

8. Using the NPV profiles above, which franchise or franchises should be accepted if they are independent? Mutually exclusive? Explain. Are your answers correct at any cost of capital less than 23.6%?

9. Which method is best and why?

- finance -
**telly**, Saturday, June 30, 2012 at 5:24pmhelppppppp

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