Net present value , Internal Rate of Return, Sensitivity Analysis. Francesca Freed wants a Burg-N- Fry franchise.
Question:
Net present value, Internal Rate of Return, Sensitivity Analysis. Francesca Freed wants a Burg-N- Fry franchise. The buy-in is $500,000. Burg-N-Fry headquarters tells Francesca that typical annual operating costs are $160,000 (cash) and that she can bring in “as much as” $260,000 in cash revenues per year. Burg- N-Fry headquarters also wants her to pay 10% of her revenues to them per year. Francesca wants to earn at least 8% on the investment, because she has to borrow the $500,000 at a cost of 6%. Use a 12-year window, and ignore taxes.
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 headquarters, 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?
Net Present ValueWhat is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at... 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...
Step by Step Answer:
Cost Accounting A Managerial Emphasis
ISBN: 978-0136126638
13th Edition
Authors: Charles T. Horngren, Srikant M.Dater, George Foster, Madhav