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 program, your grandfather died and left you $250,000 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 purchase 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 four years. After four years you will sell off your investment and 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 4 and the forecast of how each franchise will do over the four-year period.
Franchise L's cash flows will start off slowly but will increase rather quickly as people become more health conscious, 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 S serves only dinner, while Franchise L serves breakfast and lunch, so it is possible for you to invest in both franchises (i.e., projects may or may not be independent). You see these franchises as perfect complements to one another: you could attract both the lunch and dinner crowds and the health conscious and not so health conscious crowds without the franchises' directly competing against one another. Here are the net cash flows (in thousands of dollars):
Year Franchise L Franchise S
0 -100 -100
1 10 90
2 50 70
3 60 50
4 80 20
Depreciation, salvage values, net working capital requirements, and tax effects are all included in these cash flows.
You also have made subjective risk assessments of each franchise, and concluded that both franchises have risk characteristics that require a return of 8 percent. You must now determine whether one or both of the projects should be accepted.
1. Create a time line for each of the franchises. (please show a timeline) 2.What is each franchise's NPV? (Please show formula, steps, final answer) 3. Calculate the IRR for each project. (Please show formula, excel or calculator steps, final answer) 4. Find the MIRRs for Franchises L and S. (Please show formula, steps, final answer)5. Calculate the payback period for each franchise. (Please show formula, steps, final answer) 6. Calculate the discounted payback period for each franchise. (Please show formula, steps, final answer) 7. Which option is best based on the 5 different models, if the projects are independent and if they are mutually exclusive and please explain why? (Invest in just one or both?) 8. What are the advantages and disadvantages of each of the 5 different model states? (Questions 1-6) 9. If the projects are mutually exclusive which one of the two projects would you pick and why?10. With regards to question 2, assume that you need to make your decision using only one model, which model would you choose to make your selection and why?