Question

1. Kenneth Padilla is considering investing in a franchise that will require an initial outlay of $89,000. He conducted market research and found that after-tax cash flows on the investment should be about $22,000 per year for the next 11 years. The franchiser stated that Kenneth would generate a 18.4 percent return. Her cost of capital is 8 percent. Find the Net Present Value (NPV) for the project: (Do not round intermediate calculations, round final answer to two decimals, negative should be preceded by - i.e. -123.45)

2. Based on the NPV results you obtained in the previous question, is the franchise a good investment? Why or why not? Explain fully.

Answer 1

Year	Cash Flow($)	PV @8%
0	-89000	-89000
1	22000	20370.37
2	22000	18861.45
3	22000	17464.31
4	22000	16170.66
5	22000	14972.83
6	22000	13863.73
7	22000	12836.79
8	22000	11885.92
9	22000	11005.48
10	22000	10190.26
11	22000	9435.423
NPV =	68057.21

The IRR for the project is 21.93%

Since the NPV is positive The project should be Accepted

For any clarification comment.

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