Reference no: EM132704829

Question - IHOP Corporation franchises breakfast-oriented restaurants throughout North Amer¬ica. The average development costs for a new restaurant were reported by IHOP as follows:

Land $667,000

Building 800,000

Equipment 341,000

Site improvements 185,000

Total $1,993,000

IHOP develops the restaurant properties. IHOP indicates that the franchisee pays an initial franchise fee of $300,000 for a newly developed restaurant. IHOP also receives revenues from the franchisee as follows: (1) a royalty equal to 4.5% of the restaurant's sales; (2) income from the leasing of the restaurant and related equipment; and (3) revenue from the sale of certain proprietary products, primarily pancake mixes.

IHOP reported that franchise operators earned annual revenues averaging $1,500,000 per restaurant. Assume that the net cash flows received by IHOP for lease payments and sale of proprietary products (items 2 and 3 above) average $175,000 per year per restaurant, for ten years. Assume further that the franchise operator can purchase the property for $600,000 at the end of the lease term.

Determine IHOP's net present value for a new restaurant, assuming a 10-year life, no change in annual revenues, and a 10% desired rate of return.