11.04.2010 Chapter 10. Mini Case Situation

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 $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*…show more content…*

The rationale behind that assertion arises from the idea that all such projects add wealth, and that should be the overall goal of the manager in all respects. If strictly using the NPV method to evaluate two mutually exclusive projects, you would want to accept the project that adds the most value (i.e. the project with the higher NPV). Hence, if considering the above two projects, you would accept both projects if they are independent, and you would only accept Project S if they are mutually exclusive.

(3.) Would the NPVs change if the cost of capital changed? Answer: See Chapter 10 Mini Case Show d. (1.) Define the term internal rate of return (IRR). What is each franchise 's IRR? Internal Rate of Return (IRR)

The internal rate of return is defined as the discount rate that equates the present value of a project 's cash inflows to its outflows. It is the discount rate that forces the PV of the inflows to equal the initial cost. In other words, the internal rate of return is the interest rate that forces NPV to zero. The calculation for IRR can be tedious, but Excel provides an IRR function that merely requires you to access the function and enter the array of cash

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 $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

The rationale behind that assertion arises from the idea that all such projects add wealth, and that should be the overall goal of the manager in all respects. If strictly using the NPV method to evaluate two mutually exclusive projects, you would want to accept the project that adds the most value (i.e. the project with the higher NPV). Hence, if considering the above two projects, you would accept both projects if they are independent, and you would only accept Project S if they are mutually exclusive.

(3.) Would the NPVs change if the cost of capital changed? Answer: See Chapter 10 Mini Case Show d. (1.) Define the term internal rate of return (IRR). What is each franchise 's IRR? Internal Rate of Return (IRR)

The internal rate of return is defined as the discount rate that equates the present value of a project 's cash inflows to its outflows. It is the discount rate that forces the PV of the inflows to equal the initial cost. In other words, the internal rate of return is the interest rate that forces NPV to zero. The calculation for IRR can be tedious, but Excel provides an IRR function that merely requires you to access the function and enter the array of cash

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