IHOP Corp. franchises breakfast-oriented restaurants throughout North America. The average development costs for a new restaurant were reported by IHOP as follows:

Land	$ 667,000
Building	800,000
Equipment	341,000
Site improvements	185,000
Total	$1,993,000

IHOP develops and owns the restaurant properties. IHOP indicates that the franchisee pays an initial franchise fee of $300,000 for a newly developed restaurant. IHOP also receives revenues from the franchisee as follows: (1) a royalty equal to 4.5% of the restaurant’s sales; (2) income from the leasing of the restaurant and related equipment; and (3) revenue from the sale of certain proprietary products, primarily pancake mixes.

IHOP reported that franchise operators earned annual revenues averaging $1,500,000 per restaurant. Assume that the net cash flows received by IHOP for lease payments and sale of proprietary products (items 2 and 3 above) average $200,000 per year per restaurant, for 10 years. Assume further that the franchise operator can purchase the property for $700,000 at the end of the lease term.

Determine IHOP’s:

a. Net investment (development cost less initial franchise fee) to develop a restaurant.

b. Net present value for a new restaurant, assuming a 10-year life, no change in annual revenues, and a 12% desired rate of return.

Answer rating: 100% (QA)

1 Calculation of the Net investment Amount to develop a restaurant Particulars Amount Total Developm... View the full answer