PLEASE MAKE AN EXCEL FILE FOR THIS QUESTION THAT HAS ALREADY BEEN SOLVED!

You have just graduated from the MBA program of a large university, and one of your favorite courses was "Today's Entrepreneurs." In fact, you enjoyed it so much you have decided you want to "be your own boss." While you were in the master's program, your grandfather died and left you $1million to do with as you please. YOu are not an inventor, and you do not have a trade skill that you can market; however, you have decided that you would like to purcahse at least one established franchise in the fast-foods area, maybe two (if profitable). The problem is that you have never been one to stay with any project for too long, so you figure that your time frame is 3 years. After 3 years you will go on to something else. You have narrowed your selection down to two choices: 1) Franchise L, Lisa's Soups, Salads and Stuff, and 2.) Franchise S, Sam's Fabulous Fried chicken. The net cash flows shown below include the price you would receive for selling the franchise in Year 3 and the forecast of how each franchise will do over the 3-year period. Franchise L's cash flows will start off slowly but will increase rather quickly as peiople become more health-concious, while Franchise S's cash flows will start off high but will trail off as other chicken competitors enter the marketplace and as people become more health-concious and avoid fried foods. Franchise L serves breakfast and lunch wereas Franchise S serves only dinner, so it is possibly for you to invest in both franchises. You see these franchises as perfect complements to one another: You could attract both the lunch and dinner crowds and the health-concious and not-so-health concious crowds without the franchises directly competing against one another. Here are the next cash flows (in thousands of dollars)

Franchise L Franchise S

Year 0 -100 -100

Year 1 10 70

Year 2 60 50

Year 3 80 20

Depreciation, salvage values, net working capital requirements, and tax effects are all included in these cash flows. You also have made sbjective risk assessments of each franchise and concluded that both franchises have risk characteristics that require a return of 10%.

QUESTION: Defind the term modified IRR (MIRR). Find the MIRRs for Franchises L and S

ANSWER:

MIRR is the discount rate which equals to the present value of the terminal value of the inflows, compounded at the cost of capital, to the present value of the costs.

MIRRs for L= (1+0.1)^1=0.9091*10=9.091

MIRRs for S= (1+0.1)^1=0.9091*70=63.63

Explanation:

MIRR is the discount rate which equals to the present value of the terminal value of the inflows, compounded at the cost of capital, to the present value of the costs.

MIRR for L = 16.5%. while MIRR for S: =16.9%. Thus, franchise S is ranked higher than L. This result is consistent with the NPV decision.