During a Fogelman MBA alumni dinner in 1 0 years your classmate approaches you about investing in
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Question:
During a Fogelman MBA alumni dinner in years your classmate approaches you about
investing in the local restaurant chain Deweys and gives you the pertinent cash flow
estimations. He suggests you buy a building and franchise, for a total initial cash outflow of $
million. He projects this will yield positive cash flows of $ per year for years, plus a
building worth $ million in year
a Assuming you have all requisite money to invest, if you demand a return to take on the risk
of this investment, would you accept his offer? Compute NPV and IRR to justify your answer.
A few weeks later, you receive a followup email from your fellow alumnus stating that hes found
two restaurant spaces to lease, rather than buy. The smaller space only requires an initial cash
outflow of $ for a down payment and franchise fee and would yield annual cash flows of
$after lease payments for years. The bigger space requires a bigger down payment
but yields higher annual cash flows of $ for years. So projected cash flows are as follows:
CF $s
Year Purchase Small Lease Big Lease
b Assuming the same cost of capital, calculate and report the NPV IRR, Payback, and
Profitability index for both projects. Use these calculations to answer the following questions:
c If only the small restaurant is available, would you invest? If only the big restaurant is available,
would you invest? If your classmate offered you both restaurant opportunities, would you
invest in both? If you had to choose between the small and the big restaurant, which would you
choose and why?
d If your required return on this investment was which investment would you choose and
why?
e Now consider your profitability index calculations with the WACC Do your answers in
Part C change if there are multiple small and multiple big locations available for your
investment and you have the capital to invest ie you can invest in or more small lease
projects
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