You have just graduated from the MBA program of a large university, and one of your favor$-$ite 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 $$1$ million to do with as you please. You are not an inventor, and you do not have a trade skill that you can market; however, you have decided that you would like to purchase at least one established franchise in the fast$-$foods area, maybe two $($if profitable$).$ The problem is that you have never been one to stay with any project for too long, so you figure that your time frame is $3$ years. After $3$ years, you will go on to something else. You have narrowed your selection down to two choices: $(1)$ Franchise L$,$ Lisa$$s

Soups, Salads & Stuff, and $(2)$ Franchise S$,$ Sam$$s Fabulous Fried Chicken. The net cash flows that follow include the price you would receive for selling the franchise in Year $3$ and the forecast of how each franchise will do over the $3-$year period. Franchise L$$s cash flows will start off slowly but will increase rather quickly as people become more health$-$conscious, 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$-$conscious and avoid fried foods. Franchise L serves breakfast and lunch, whereas Franchise S serves only dinner, so it is possible 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$-$conscious and not$-$so$-$health$-$conscious crowds without the franchises directly competing against one another. Here are the net cash flows $($in thousands of dollars$)$: Expected Net Cash Flows

Year $0123$

Franchise L $$$$100106080$

Franchise S $$$$100705020.(1)$ Define the term $$internal rate of return $($IRR$).$ What is each franchise$$s IRR? $(2)$ How is the IRR on a project related to the YTM on a bond? For example, suppose the initial cost of a project is $$100$ and it has cash flows of $$40$ each year at Years $1,2,$ and $3.$ What is its IRR? Use the Excel RATE function as though the project were a bond. $(3)$ What is the logic behind the IRR method? According to IRR, which franchises should be accepted if they are independent? Mutually exclusive? $(4)$ Would the franchises$$ IRRs change if the cost of capital changed