In an unrelated analysis, you have the opportunity to choose between the following two mutually exclusive projects:

The projects provide a necessary service, so whichever one is selected is expected to be repeated into the foreseeable future. Both projects have a 10% cost of capital.
What is each project's initial NPV without replication?

MINI CASE 

You have just graduated from the MBA program of a large university, and one of your favorite  courses was “Today’s Entrepreneurs.” In fact, you enjoyed it so much you have decided you  want to “be your own boss.” While you were in the master’s program, your grandfather died  and left you $1 million to do with as you please. You are not an inventor, and you do not have  a trade skill that you can market; however, you have decided that you would like to purchase  at least one established franchise in the fast-foods area, maybe two (if profitable). The problem  is that you have never been one to stay with any project for too long, so you figure that your  time frame is 3 years. After 3 years you will go on to something else.

You have narrowed your selection down to two choices: (1) Franchise L, Lisa’s Soups, Salads,  & Stuff, and (2) Franchise S, Sam’s Fabulous Fried Chicken. The net cash flows shown  below include the price you would receive for selling the franchise in Year 3 and the forecast  of how each franchise will do over the 3-year period. Franchise L’s cash flows will start off  slowly but will increase rather quickly as people become more health-conscious, while Franchise  S’s cash flows will start off high but will trail off as other chicken competitors enter the  marketplace and as people become more health-conscious and avoid fried foods. Franchise L  serves breakfast and lunch whereas Franchise S serves only dinner, so it is possible for you to  invest in both franchises. You see these franchises as perfect complements to one another: You  could attract both the lunch and dinner crowds and the health-conscious and notso-  health-conscious crowds without the franchises directly competing against one another.

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

Transcribed Image Text:

Expected Net Cash Flows Project L (S100,000) 33,500 Project S (S100,000) Year 60,000 60,000 33,500 33,500 4 33,500