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MODULE 7: It is 2022 and CompuTech has decided to expand its business. They have the choice of taking over a competitor in their community and expanding their market presence or they can open a second business which is a franchise opportunity. In the first option the takeover cost would be $300,000 and would result in net cash flow of $60,000 per year beginning in the second year of ownership. No net cash flow is expected in the first year as takeover expenses would offset any proceeds. It is estimated that the business begin acquired could have a residual value of $200,000 in the 10th year. This second option involves franchising at a cost of $75,000 per year with the potential to bring in $100,000 of net profits in each year, beginning in year 2. No proceeds are forecast in year 1. The franchise would run for only 8 years. Q1: If the CompuTech cost of capital is 7% which of the options available to the Martins would you recommend? Remember to do a NPV calculation, a Payback calculation, and an IRR calculation to support your answer. C D E F G H M N Years 1 2 3 4 5 6 7 8 9 10 0 -300x000 $0 $60,000 $60,000 $60,000 $60,000 $60,000 $60,000 $60,000 $60,000 $60,000 -300000 $200,000 $0 $60,000 $60,000 $60,000 $60,000 $60,000 $60,000 $60,000 $60,000 $260,000 -300000-$240,000-$180,000-$120,000 $60,000 $0 $60,000 $120,000 $180,000 $140,000 -$75,000 $0 $75,000 $75,000 $75,000 $75,000 $75,000 $75,000 $75,000 $0 $100,000 $100,000 $100,000 $100,000 $100,000 $100,000 $100,000 A B 1Payback period 2 3 4 Option 1 Take over 5 Option 1 Positive cash flow 6 2 Salvage value 8 net cash flow 9 Payback 10 11 option 2 - Franchise 12 option 2 postive cash flow 13 14 Salvage value 15 Net cash flow 16 Payback 17 18 19 NPV 20 21 Alternavtive 1 22 3 Alternative 2 4 5 Interest rate 5 IRR 3 Alternative 1 -$75,000 $0 $0 $25,000 $25,000 $25,000 $25,000 $25,000 $25,000 $25,000 $75,000 $50,000 $25,000 $0 $25,000 $50,000 $75,000 $100,000 $167,010 $50,918 7.00% 14.90% Alternative 2 20.04%