net present value internal rate of return sensitivity analysis 269066

Net present value, Internal Rate of Return, Sensitivity Analysis Sally wants to purchase a Burgers N Fries franchise. She can buy one for $500,000. Burgers N Fries headquarters provides the following information:

Estimated annual cash revenues$280,000

Typical annual cash operating expenses $165,000

Sally will also have to pay Burgers N Fries a franchise fee of 10% of her revenues each year. Sally wants to earn at least 10% on the investment because she has to borrow the $500,000 at a cost of 6%. Use a 10 year window, and ignore taxes.

Required

1. Find the NPV and IRR of Sally’s investment.

2. Sally is nervous about the revenue estimate provided by Burgers N Fries headquarters. Calculate the NPV and IRR under alternative annual revenue estimates of $260,000 and $240,000.

3. Sally estimates that if her revenues are lower, her costs will be lower as well. For each revised level of revenue used in requirement 2, recalculate NPV and IRR with a proportional decrease in annual operating expenses.

4. Suppose Sally also negotiates a lower franchise and has to pay Burgers N Fries only 8% of annual revenues. Redo the calculations in requirement 3.

5. Discuss how the sensitivity analysis will affect Sally’s decision to buy the franchise.