Question

0 2You have just inherited $300,000 and have decided to purchase at least one established franchise in the fast food industry or possibly nwo if profitable. Your investment horizon is 3 years. You have narrowed wn your choices to two choices: (1) Franchise L: Lisa's Soups, Salads, and Stuff and (2) Franchise S: Sam's Fried Chicken. The net cash flows shown below include the price you would receive for selling e franchise in 3 years 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 people become more health 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 conscious and avoid fried foods. Franchise serves breakfast and lunch, while franchise S serves only dinner, so it is possible to invest in both franchises. You see these franchises as perfect complements to on another: you could attract both the lunch dinner crowds and the health conscious and not so health conscious crowds with the franchises directly competing against one another 9Hereare the projects' net cash flows (in thousands of dollars) 10 Expected Net Cash Flows Franchise L Franchise S (8100)(S100) Year 12 13 14 15 16 17 18 19 70 50 ation, salvage values, net working capital requirements, and tax e ects are all included เท these cash ows You have made subjective risk assessment o each ranchse, and concluded that both se have risk characteristics that require return 10% You must now determine whether one or both of the projects should be accepted. 201. The NPVof franchise L is 21 2, The NPV offranchise S is 223. The IRR of franchise L is 234. 24 5、 25 | 6. 26 27 28 The IRR of franchise Sis The MIRR ofLis. The MIRR is S is 267,Draw NPV profies for both franchises. Show at what discount rate do the profiles cross?

Answer 1

Particulars	Year 0	Year 1	Year 2	Year 3
Franchise L	-100	10	60	80
Franchise S	-100	70	50	20
PV @10%	1	0.909	0.826	0.751
NPV of Franchise L	-100
		9.09	49.56	60.08
NPV of Franchise S	-100
		63.63	41.3	15.02
NPV of Franchise L	18.73
NPV of Franchise S	19.95
IRR of Franchise L	7%
IRR of Franchise S	12%
MIRR of Franchise L	6%
MIRR of Franchise S	16%