NAME 2 COSTS/DRAWBACKS OF SETTING UP A FRANCHISE?
1 answer:
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Solution:
NPV is calculated as:
NPV =
Initial investment = $16,500,000
Depreciation table:
Recovery Year 7-Year % Depreciation Booked Asset Book
Value at the end of Year
1 14.29 $ 3,029,480 $ 18,170,520
2 24.49 $ 5,191,880 $ 12,978,640
3 17.49 $ 3,707,880 $ 9,270,760
4 12.49 $ 2,647,880 $ 6,622,880
5 8.93 $ 1,893,160 $ 4,729,720
6 8.92 $ 1,891,040 $ 2,838,680
7 8.93 $ 1,893,160 $ 945,520
8 4.46 $ 945,520 $ 0
Book value at the end of 5 years = $ 4 , 729 , 720
After tax salvage value = 25 % ∗ $ 21 , 200 , 000 − ( 25 % ∗ $ 21,200,000) - $4,729,720 ) * 30%
= $ 5, 128 ,916
Sales table:
Year Unit Sales
1 83,000
2 96,000
3 1,10,000
4 1,05,000
5 86,000
We calculate the free cash flow of the project : ( Check the attachment )
1)
Using NPV formula
NPV = − $ 7 , 328 , 810.58
2)
IRR is the discount rate (R) when the NPV of the project will be equal to zero.
Solving the equation (1) for R we get:
R = 3.93%
So IRR of the project = 3.93%
