Chapter 12, Problem 4MC

a)

Summary Introduction

Case summary:

Person X is graduated from large university. He desired to become an entrepreneur. After death of his grandfather he got a business worth of $1million. Then he decided to buy minimum one franchise in the area of fast foods.an issue behind is that he will sell off investment after 3 years and go on to something else.

Person X has two alternatives franchise L and franchise S. Franchise L providing breakfast and lunch while franchise S is providing only dinner. Person X made evaluation of each franchise and find out that both have characteristics of risk and needs rate of return of 10%.

Here are the net cash flows (in thousand $)

To determine: The definition of internal rate of return and the IRR of each franchise’s.

b)

Summary Introduction

To determine: The relationship between IRR and YTM and IRR if equal cash inflow of $40.

c)

Summary Introduction

To determine: The logic behind the IRR method and the franchises must be accepted if they are independent and equally exclusive.

d)

Summary Introduction

To determine: Whether IRR changes with respect to change in cost of capital.