Using Npv and Irr Data Analysis Chapter

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NPV profiles for Franchises L. and S. At what discount rate do the profiles cross?

NPV

Due to the way that the revenues vary, they actually cross at a couple different points.

Look at your NPV profile graph without referring to the actual NPVs and IRRs. Which franchise or franchises should be accepted if they are independent? Mutually exclusive? Explain. Are your answers correct at any cost of capital less than 23.6%?

NPV

IRR

What is the underlying cause of ranking conflicts between NPV and IRR?

Because the NPV value reflects the cost of capital and the IRR does not.

g. Define the term modified IRR (MIRR). Find the MIRRs for Franchises L. and S.

MIRR considers the interest that could be potentially generated by the revenues, along with the revenues themselves.

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0

($100)

($100)

NPV

($7.50)

$0.58

IRR

18%

24%

MIRR

19%

23%

h. What does the profitability index (PI) measure? What are the PI's for Franchises S. and L?

Answer:

It's the PV divided by the initial investment. -.075 & .058 respectively.

i. 1. What is the payback period? Find the paybacks for Franchises L. and S.

Answer: L. pays back in year 2, while S. is in year 3.

i. 2. What is the rationale for the payback method? According to the payback criterion, which franchise or franchises should be accepted if the firm's maximum acceptable payback is 2 years, and if Franchises L. and S. are independent?….....

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