Reference no: EM132515790

Point 1: Jenny Jinglebell has always wished to own her own French macaroons shop. Ever since she tried her first macaroon, she thought it would be a brilliant idea to have her own shop where she can sell a multitude of ?avors and colors of French macaroons. She purchased a premium site for
the macaroons shop, right across the street from |Campus Martius Park in Downtown Detroit. After extensive research, Jenny decided that it is best for her to open a franchise at first.

Point 2: The franchise that best fit Jenny's criteria is Francois Patisserie. A Francois Patisserie franchise costs $30,000, an amount that is amortized over 15 years. As a franchisee, Jenny needs to adhere to the company's building specifications. The building would cost an estimated $450,000 and would result in a $50,000 salvage value at the end of its 15-year life. The equipment needed is sold as a package by the corporate of?ce at a cost of $200,000, will have a salvage value of 510,000 at the end of its 5-year life, equipment and must be replaced every 5 years.

Point 3: Jenny estimates the annual revenue from a Francois Patisserie franchise at $950,000. Food costs typically run 36% of revenue. Annual operating expenses, not including depreciation, total $425,000. For financial reporting purposes, Jenny will use straight-line depreciation and amortization. Based on past experience, she uses a 16% discount rate.

Required:

Question 1: Calculate the shop's net present value over the franchise's 15-year life.

Question 2: Calculate the restaurant's payback period.

Question 3: Calculate the restaurant's simple rate of return.

Question 4: Should Jenny open a Francois Patisserie? Why or why not? Note: for comparison purposes, you should know that using Excel or a similar spreadsheet application Jenny calculates her IRR to be 22.64%.

Question 5: What potential shortcomings do you see in Jenny‘s estimates? How do you recommend she adjusts her analysis to address these shortcomings