Please, not only just post the answers, but also show the steps for each calcula
ID: 1170164 • Letter: P
Question
Please, not only just post the answers, but also show the steps for each calculation, You will receive thumbs up if all of the questions have been answered correcly !!!
James Polk Hospital has currently unused space in its lobby. In three years, the space will be required for a planned expansion, but the hospital is considering uses of the space until then. The hospital has decided that it wants to purchase at least one and maybe two fast food franchises, to take advantage of the high volume of patients and visitors that walk through the lobby all day long. The hospital plans to purchase the franchise(s), operate them for three years, and then close them down. The hospital has narrowed its selection down to two choices:
Franchise L: Lisa's Soups, Salads, and Stuff
Franchise S: Sam's Wonderful Fried Chicken
The net cash flows shown below include the costs of closing down the franchises in Year 3 and the forecast of how each franchise will do over the three-year period. Franchise L serves breakfast and lunch, while Franchise S serves only dinner, so it is possible for the hospital to invest in both franchises. The hospital believes these franchises are perfect complements to one another: The hospital could attract both the breakfast/lunch and dinner crowds and both the health-conscious and not-so-health-conscious crowds without the franchises directly competing against one another. The corporate cost of capital is 10 percent.
Net cash flows
Year
Franchise S
Franchise L
0
-$100
-$100
1
$70
$10
2
$50
$60
3
$20
$80
a. Calculate each franchise's payback period, net present value (NPV), internal rate of return (IRR), and modified internal rate of return (MIRR).
b. Graph the NPV of each franchise at different values of the corporate cost of capital from 0 to 24 percent in 2 percent increments.
- How sensitive are the franchise NPVs to the corporate cost of capital?
- Why do the franchise NPVs differ in their sensitivity to the corporate cost of capital?
- At what cost of capital does each franchise intersect the X-axis? What are these values?
c. Which project or projects should be accepted if they are independent? Which project should be accepted if they are mutually exclusive?
d. Suppose the hospital could sell off the equipment for each franchise at the end of any year. Use NPV to determine the optimal economic life of each franchise when the salvage values are as follows:
Salvage value
Year
Franchise S
Franchise L
0
$100
$100
1
$60
$70
2
$20
$30
3
$0
$0
Net cash flows
Year
Franchise S
Franchise L
0
-$100
-$100
1
$70
$10
2
$50
$60
3
$20
$80
Explanation / Answer
a. Calculation of payback period Franchise S Year Cash Inflow Cumulative cash inflow 1 70 70 2 50 120 3 20 140 Payback period = Years before full recovery + (unrecovered cost / cash flow duriung the year) = 1 + (100-70 / 50) 1.6 Franchise L Year Cash Inflow Cumulative cash inflow 1 10 10 2 60 70 3 80 150 Payback period = Years before full recovery + (unrecovered cost / cash flow duriung the year) = 2 + (100-70 / 80) 2.375 Calculation of Net Present Value (NPV) Franchise S Year Cash Inflow PVF @ 10% PV 1 70 0.909 63.63636 2 50 0.826 41.32231 3 20 0.751 15.0263 Present Value of cash inflow 119.985 Less: Cash outflow -100 19.98497 Franchise L Year Cash Inflow PVF @ 10% PV 1 10 0.909 9.090909 2 60 0.826 49.58678 3 80 0.751 60.10518 Present Value of cash inflow 118.7829 Less: Cash outflow -100 18.78287 Calculation of IRR Franchise S Let r = 10% Year Cash Inflow PVF @ 10% PV 1 70 0.909 63.63636 2 50 0.826 41.32231 3 20 0.751 15.0263 Present Value of cash inflow 119.985 Less: Cash outflow -100 19.98497 Let r = 30% Year Cash Inflow PVF @ 30% PV 1 70 0.769 53.84615 2 50 0.592 29.5858 3 20 0.455 9.103323 Present Value of cash inflow 92.53528 Less: Cash outflow -100 -7.46472 IRR = L + (NPV (L) / NPV (l) - NPV (h)) * (H-L) 24.5611609 Franchise L Let r = 10% Year Cash Inflow PVF @ 10% PV 1 10 0.909 9.090909 2 60 0.826 49.58678 3 80 0.751 60.10518 Present Value of cash inflow 118.7829 Less: Cash outflow -100 18.78287 Let r = 30% Year Cash Inflow PVF @ 30% PV 1 10 0.769 7.692308 2 60 0.592 35.50296 3 80 0.455 36.41329 Present Value of cash inflow 79.60856 Less: Cash outflow -100 -20.3914 IRR = L + (NPV (L) / NPV (l) - NPV (h)) * (H-L) 19.58938071 Calculation of MIRR Franchise S 70 * 1.1*1.1 Year 1 cashflows re invested for 2 years 84.7 50*1.1 Year 2 cashflows re invested for 1 year 55 20 Year 3 cashflows cannot be re invested Total = 84.7+55+20 Terminal value = 159.7 MIRR = (159.7/100)cube root - 1 1.168 Franchise L 10 * 1.1*1.1 Year 1 cashflows re invested for 2 years 12.1 60*1.1 Year 2 cashflows re invested for 1 year 66 80 Year 3 cashflows cannot be re invested Total = 12.1+66+80 Terminal value = 158.1 MIRR = (158.1/100)cube root - 1 1.165