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

You have just graduated and one of your favorite courses was Financial Management. While you were in school, your grandfather died and left you $1 million. You have decided to invest the funds in a fast-food franchise and have two choices–Franchise L and Franchise S. You only intend to be in business for three years and then sell the franchise. See the cash flows for each year below:

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 5:24pm
helppppppp

## Answer this Question

## Related Questions

- finance - BBA307: Finance Exercise 8A Assignment 8.1 Assignment 8.1: Capital ...
- Finance - Assignment 8.1: Capital Budgeting Application You have just graduated...
- college math HELP!!!!! - Sharon has a total of $190,000 to invest in three types...
- FInance - Assume that you have $10,000 which you plan to invest for 3 years. How...
- Statistics - Probability - A mutual fund company has six funds that invest in ...
- Finance - A U.S. Firm wants to raise $10 million of capital so it can invest in ...
- finance - Templeton Extended Care Facilities, Inc. is considering the ...
- finance - Templeton Extended Care Facilities, Inc. is considering the ...
- finance - Templeton Extended Care Facilities, Inc. is considering the ...
- Finance - Templeton Extended Care Facilities Inc, is considering the acauision ...

More Related Questions