Find the logic behind the irr method according to irr which

Reference no: EM13476981

You have just graduated and one of your favorite courses was Financial Management. While you were in school, your grandfather died and left you $1 million. You have decided to invest the funds in a fast-food franchise and have two choices-Franchise L and Franchise S. You only intend to be in business for three years and then sell the franchise. See the cash flows for each year below:

Year	Franchise L	Franchise S
0	$100	$100
1	$ 10	$ 70
2	$ 60	$ 50
3	$ 80	$ 20

Depreciation, salvage values, net working capital requirements, and tax effects are included in the cash flows. The required rate of return is 10%. You must decide which franchise to invest in.

Procedure

1. What is each franchise's NPV? Be sure to show your calculations.

2. According to the NPV, which franchise or franchises should be accepted if they are independent? Which should be accepted if they are mutually exclusive?

3. Would the NPV change if the cost of capital changed?

4. What is each franchise's IRR? Be sure to show your calculations.

5. What is the logic behind the IRR method? According to the IRR, which franchises should be accepted if they are independent? Mutually exclusive?

6. Would the franchises' IRR change if the cost of capital changed?

7. Draw the NPV profiles for each franchise. At what discount rate do the profiles cross?

8. Using the NPV profiles above, which franchise or franchises should be accepted if they are independent? Mutually exclusive? Explain. Are your answers correct at any cost of capital less than 23.6%?

9. Which method is best and why?

Reference no: EM13476981

Questions Cloud

If the price of silver goes down to 1294 at the same time : sterling jones purchases a 5000-troy ounce contract on silver at 13.00 an ounce. at the same time he purchases a 112000

Suppose that a stock is selling for 6675 with options : assume a stock is selling for 66.75 with options available at 60 65 and 70 strike prices. the 65 call option price is

The bond pays 60 per year interest and is selling in the : a convertible bond has a face value of 1000 and the conversion price is 50 per share. the stock is selling at 42 per

If fred completes business succession documents that : 1. lf fred dies today what is the amount included in his gross estate?a. 10828500 b. 10953000 c. 12040500 d. 121505002.

Find the logic behind the irr method according to irr which : you have just graduated and one of your favorite courses was financial management.nbsp while you were in school your

Describe to your client general rules surrounding whether : one of your corporate clients has approached you about whether or not its employees are required to include certain

Seriously contemplating early retirement fred wants to know : 1. which of the following in addition to current arrangements would generate a taxable gift?a. a gift of14000 from the

Determine the operating income ebit for both : question firm a has 10000 in assets entirely financed with equity. firm b also has 10000 in assets but these assets are

Determine ways to achieve economies of scope by leveraging : synergy is an often-used word in business but as the popular press and the textbook suggest many efforts at

User Account

All Pages