Herb E. Vore is considering investing in a Salad Stop franchise that requiresan initial outlay of $100,000. He conducted market research and found thatafter-tax cash flows on this investment should be about $20,000 a year forthe next 7 years. The franchiser states that Herb will generate a 20 percentrate of return. Herb currently has his money in a mutual fund, which hasgrown at an average annual rate of 10 percent. He tells the franchiser thatmoney has a time value, and the actual rate of return according to his calculationsis much less than 20 percent.a. Do you agree with the franchiser or with Herb?b. What rate of return is the franchiser using, and what method did Salad Stopuse to calculate it? c. What rate of return is Herb using, and what method did he use?d. Should Herb make the investment? Explain your answer.
Herb E. Vore is considering investing in a Salad Stop franchise that requires
an initial outlay of $100,000. He conducted
after-tax cash flows on this investment should be about $20,000 a year for
the next 7 years. The franchiser states that Herb will generate a 20 percent
grown at an average annual rate of 10 percent. He tells the franchiser that
money has a time value, and the actual rate of return according to his calculations
is much less than 20 percent.
a. Do you agree with the franchiser or with Herb?
b. What rate of return is the franchiser using, and what method did Salad Stop
use to calculate it?
c. What rate of return is Herb using, and what method did he use?
d. Should Herb make the investment? Explain your answer.
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