Capital Budgeting Application



Capital Budgeting Application

Question No. 1

Franchise's NPV

NPV of both franchises is calculated below.

Franchise L

Year

Cash Flow

DF 10%

DCF

0

-100

1.0000

-100.00

1

10

0.9091

9.09

2

60

0.8264

49.59

3

80

0.7513

60.11

 

 

NPV

18.78

 

 

IRR

18.1%

Above presented calculation shows that net present value of investment in Franchise L is 187,800 dollars.

Franchise S

Year

Cash Flow

DF 10%

DCF

0

-100

1.0000

-100.00

1

70

0.9091

63.64

2

50

0.8264

41.32

3

20

0.7513

15.03

 

 

NPV

19.98

 

 

IRR

23.6%

Above presented calculation shows that net present value of investment in Franchise S is 199,800 dollars.

Question No. 2

Investment Evaluation

Investment in both franchises should be accepted if both projects are independent in nature. Since NPV of both projects is positive, therefore investment in both projects will lead to improving the overall investment value. Contrastingly, in case of mutually exclusive project, investment should be made only in Franchise ...