Anita Daye is investigating purchasing an ice cream franchise from Creamery, Inc., to sell various ice...

 

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Anita Daye is investigating purchasing an ice cream franchise from Creamery, Inc., to sell various ice cream dishes under the Creamery, Inc. name. She has compiled the following information: 1) She can rent a small store for $5,800 per month. She expects this rental cost to increase at an approximate rate of 4% annually. 2) The original investment in equipment will be $352,000. She expects to have to replace some of this equipment at the end of the eighth year, and she estimates that the replacement cost will be $78,000. Also, the equipment that is being replaced can be sold "used," and she expects to be able to sell that equipment for approximately $14,000. 3) Anita estimates that sales would begin at $380,000 annually, and she expects sales to increase 4% per year for the first four years, then 2% per year thereafter. 4) Anita estimates that ingredients will cost 27% of sales. 5) Estimated fixed annual operating costs are $95,000 per year for salaries (which will increase at 2% per year), $6,200 per year for insurance (which will increase at 1% per year), and $36,000 per year for other costs (utilities, etc., which she predicts will increase at 5% per year). Required: A) Name and define the analytical techniques that should be used to perform an analysis of Anita's proposed franchise. B) Please perform the analyses named in (A) and recommend a course of action. Anita desires an annual rate of return of 22%, and wishes to use a 15 year timeframe for the analysis. Anita Daye is investigating purchasing an ice cream franchise from Creamery, Inc., to sell various ice cream dishes under the Creamery, Inc. name. She has compiled the following information: 1) She can rent a small store for $5,800 per month. She expects this rental cost to increase at an approximate rate of 4% annually. 2) The original investment in equipment will be $352,000. She expects to have to replace some of this equipment at the end of the eighth year, and she estimates that the replacement cost will be $78,000. Also, the equipment that is being replaced can be sold "used," and she expects to be able to sell that equipment for approximately $14,000. 3) Anita estimates that sales would begin at $380,000 annually, and she expects sales to increase 4% per year for the first four years, then 2% per year thereafter. 4) Anita estimates that ingredients will cost 27% of sales. 5) Estimated fixed annual operating costs are $95,000 per year for salaries (which will increase at 2% per year), $6,200 per year for insurance (which will increase at 1% per year), and $36,000 per year for other costs (utilities, etc., which she predicts will increase at 5% per year). Required: A) Name and define the analytical techniques that should be used to perform an analysis of Anita's proposed franchise. B) Please perform the analyses named in (A) and recommend a course of action. Anita desires an annual rate of return of 22%, and wishes to use a 15 year timeframe for the analysis.

Answer rating: 100% (QA)

Anita should use Net present value method of Capital budgeting to ... View the full answer