You have just graduated from the MBA program of a large university, and one of favorite courses
was "Today's Entrepreneurs." In fact, you enjoyed it so much you have decided you want to "be
your own boss." While you were in the master's program, your grandfather died and left you $1
million to do with as you please. You are not an inventor, and you do not have a trade skill that
you can market; however , you have decided that you would like to purchase at least one
established franchise in the fast-foods area, maybe two (if profitable). The problem is that you
have never been one to stay with any project for too long, so you figure your time frame is 3
years. After 2 years you will go on to something else.
You have narrowed your selection down to two choices: (1) Franchise L, Lisa's Soups, Salads, &
Stuff, and (2) Franchise S, Sam's Fabulous Fried Chicken. The net cash flows shown below
include the price you would receive for selling the franchise in Year 3 and the forecast of how
each franchise will do over the 3-year period. Franchise L's cash flows will start off slowly but
will increase rather quickly as people become more health-conscious, while Franchise S's cash
flows will start off high but will trail off as other chicken competitors enter the marketplace and
as people become more health-conscious and avoid fried foods. Franchise L serves breakfast and
lunch whereas Franchise S serves only dinner, so it is possible for you to invest both franchises.
You see these franchises as perfect complements to one another: You could attract both the lunch
and dinner crowds and the health-conscious and not-so-health-conscious crowds without the
franchises directly competing against one another.
Here are the net Cash flows (in thousands of dollars):
Expected Net Cash Flow
Year Franchise L Franchise S
0 ($100) ($100)
1 10 70
2 60 50
3 80 20
Depreciation, salvage values, net working capital requirements and tax effects are all included in
these cash flows. You also have made subjective risk assessments of each franchise and
concluded that both franchises have risk characteristics that require a return of 10%. You must
now determine whether one or both of the franchises should be accepted.