IHOP Corporation franchises breakfast-oriented restaurants throughout North America. 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. Use the present value tables appearing in Exhibits 1 and 2 in this chapter.