# Fin discounted payback period | Business & Finance homework help

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 L serves breakfast and lunch, while Franchise S serves only dinner, so it is possible for you to invest in both franchises. 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):
￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼0
Expected
￼net cash flows
year ￼￼Franchise Franchise
S L
￼￼0 (100) (100)
￼￼￼￼￼￼￼￼1 70 10
￼￼￼￼￼￼￼￼￼￼￼￼￼￼2 50 60
￼￼￼￼￼￼￼￼￼￼￼3 20 80
￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼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 10 percent. You must now determine whether one or both of the projects should be accepted.
In order to do so please answer the following questions fully. Make sure to show a time line, the formula to be used, the steps taken to solve the problem (calculator or excel) and the final numerical answer when appropriate.
Questions:
Net Present Value (NPV) (Worth 10 points)
1. Define the term net present value (NPV).
2. What is each franchise’s NPV? Make sure to show the formula, steps and final answer.
4. Would your answer be different if the projects are independent or mutually exclusive? Why
or why not?
5. Would the NPVs change, and therefore your answer, if the cost of capital changed? Why or
why not?
Internal Rate of Return (IRR) – you may use a financial calculator or excel. (Worth 8 points)
1. What is the logic/idea behind the IRR method?
2. Calculate the IRR for each project. Make sure to show the formula, calculator or excel steps
3. According to IRR, which franchise should be accepted if they are independent? Mutually
exclusive? Why?
4. Would the franchises’ IRRs change if the cost of capital changed? Why or why not?
Modified Internal Rate of Return (MIRR) (Worth 9 points)
1. Define the term modified IRR (MIRR).
2. Find the MIRRs for Franchise L and S. Make sure to show the formula, steps and final
3. What are the MIRR’s advantages and disadvantages vis-a-vis the regular IRR? What are the
Payback and Discounted Payback Period (Worth 10 points)
1. What is the rationale for the payback method?
2. Calculate the payback period for each franchise. Make sure to show the formula, steps and
3. Calculate the discounted payback period for each franchise. Make sure to show the formula,
4. According to the payback criterion, which franchise or franchises should be accepted if the
firm’s maximum acceptable payback is 2 years, and if Franchise L and S are independent? If
they are mutually exclusive? Why?
5. What is the difference between the regular and discounted payback periods? Make sure to
This question is worth 13 points.
Based on the results obtained and everything that you have described above, which franchise would you ultimately choose if the projects are mutually exclusive? Explain in detail your decision and why you chose the model you did to make your final decision.

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