Tax effects are all included in these cash flows

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Reference no: EM131884442

Here are the net cash flows (in thousands of dollars):

Expected Net Cash Flows

Year Franchise L Franchise S

0 ($120) ($120)

1 20 90

2 70 15

3 85 60

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 14%.

A. Look at your NPV profile graph without referring to the actual NPVs and IRRs. 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 12%?

B. What is the underlying cause of ranking conflicts between NPV and IRR?

C. What does the profitability index (PI) measure? What are the PI’s for Franchises S and L?

Reference no: EM131884442

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