Question

A) What is the NPV of buying both stores?

A savvy business owner who owns several chicken franchises is seeking to add another store to his portfolio of stores. He wants to buy a store in the Memphis market at a cost of $8.00 million. However, the owner will sell the store to him, BUT he also has to buy a second store in the Oxford market at a cost of $6.00 million as part of the deal. The Memphis store is doing well, but the Oxford store has cash flow issues. The business owner will have to buy BOTH stores or NONE at all. The owner has a discount rate of 11.00%. The owner will value the opportunities over a five-year period. STORE S o 1 2 3 4 5 MEMPHIS -$8.00 $1.79 $2.39 $2.18 $2.65 $6.00 OXFORD -$6.00 $0.54 $0.58 $0.83 $0.80 $4.00

B) What is the rate of return on buying both stores? (HINT: Find IRR of combined projects.)

Answer 1

fix =IRR(B294:B299) B301 А В C D Cash flow PVIF@11% Present value 292 Year 293 A в АхB (14.00) (14.00) 294 1.000 1 S 2.33 0.901 $ 295 2.10 2 S 3 S 0.812 $ 2.97 296 2.41 297 3.01 0.731 $ 2.20 3.45 0.659 $ 298 4 S 2.27 5 $ 0.593 $ 10.00 299 5.93 300 13.04% 301 IRR 302 $ 303 NPV 0.92

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