How the sensitivity analysis will affect decision

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Reference no: EM132653421

After being fired from Trident Inc. your friend Sukhdeep was having a difficult time finding employment. He wished he had been a better student by attending all his classes and not cheating on his exams and learning activities.

He knows that you have a strong work ethic and are a good business person as you obtained your BBA from Yorkville University and always behaved ethically throughout your studies.
He wants to go into partnership with you by opening a franchise and asked you for help in performing an analysis.
The opportunity involves a coffee shop franchise. Which will require a $650,000 buy in. Typical annual operating costs will be $200,000 (cash) and that the forecasted revenues will be $310,000 per year. The Franchisor demands a payment of 12% of Revenues for trademark and business model. You would like to earn at least 8% on this investment and will need to borrow the entire buy-in amount at an interest rate cost of 4%. You plan to conduct your analysis over a 15 year period and will not consider taxes at this time.

Required

Question 1. Find the NPV and IRR of this investment, given the information above.

Question 2. You are skeptical of Sukhdeep's revenue forecast of $310,000 per year. He did take Math in school and achieved a grade of 95%, however he never attended any classes and was only able to achieve this remarkable grade by plagiarizing from a classmate. You believe that a more realistic revenue forecast will be lower. Conduct a sensitivity analysis by finding the NPV and IRR (similar to Part 1 above) of this investment using $280,000 and $260,000 as the revenue forecast.

Question 3. You believe that you can negotiate a lower payment to the franchisor and also think that if revenues are lower than $310,000 costs will decrease by $20,000. Repeat the same analysis as you did in Part 2 above (using $280,000 and $260,000 forecasted revenue) with annual operating costs of $180,000 and Franchise fee of 9% of revenues

Question 4. Discuss how the sensitivity analysis will affect your decision to buy the franchise. Why don't you have to recalculate the IRR if you change the desired (discount) interest rate?

Reference no: EM132653421

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