Sally wants to purchase a Burger Barn franchise. She can buy one for $ 750,000. Burger Barn headquarters provides the following information:

Estimated annual cash revenues $ 420,000

Typical annual cash operating expenses $ 248,000

Sally will also have to pay Burger Barn a franchise fee of 10% of her revenues each year. Sally wants to earn at least 10% on the investment because she has to borrow the $ 750,000 at a cost of 6%. Use an 11- year window and ignore taxes.

Required

1. Find the NPV and IRR of Sally’s investment.

2. Sally is nervous about the revenue estimate provided by Burger Barn headquarters. Calculate the NPV and IRR under alternative annual revenue estimates of $ 390,000 and $ 360,000. Assume cash operating expenses of $ 248,000 each year and a franchise fee of 10% of revenues.

3. Sally estimates that if her revenues are lower, her costs will be lower as well. For each revised level of revenue used in requirement 2, recalculate NPV and IRR with a proportional decrease in annual operating expenses.

4. Suppose Sally also negotiates a lower franchise and has to pay Burger Barn only 8% of annual revenues. Redo the calculations in requirement 3.

5. Discuss how the sensitivity analysis will affect Sally’s decision to buy the franchise.