Francesca Freed wants a Burg-N-Fry franchise. The buy-in is $500,000. Burg-N-Fry headquarters tells Francesca that typical annual
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1. Find the NPV and IRR of this investment, given the information that Burg-N-Fry has given Francesca.
2. Francesca is nervous about the “as much as” statement from Burg-N-Fry, and worries that the cash revenues will be lower than $260,000. Repeat requirement 1 using revenues of $240,000 and $220,000.
3. Francesca thinks she should try to negotiate a lower payment to the Burg-N-Fry head- quarters, and also thinks that if revenues are lower than $260,000, her costs might also be lower by about $10,000. Repeat requirement 2 using $150,000 as annual cash operating cost and a payment to Burg-N-Fry of only 6% of sales revenues.
4. Discuss how the sensitivity analysis will affect Francesca’s decision to buy the franchise. Why don’t you have to recalculate the internal rate of return if you change the desired (discount) interest rate?
Internal Rate of Return
Internal Rate of Return of IRR is a capital budgeting tool that is used to assess the viability of an investment opportunity. IRR is the true rate of return that a project is capable of generating. It is a metric that tells you about the investment...
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Related Book For
Cost Accounting A Managerial Emphasis
ISBN: 978-0133392883
6th Canadian edition
Authors: Horngren, Srikant Datar, George Foster, Madhav Rajan, Christ
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