You also have made subjective risk assessments of

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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. a. What is capital budgeting?
b. What is the difference between independent and mutually exclusive projects?
c. (1) Define the term net present value (NPV). What is each franchise’s NPV?
3 20 15 3 80 60
(2) What is the rationale behind the NPV method? According to NPV, which franchise or franchises should be accepted if they are independent? Mutually exclusive?
d. (1) Define the term internal rate of return (IRR). What is each franchise’s IRR?
(2) How is the IRR on a project related to the YTM on a bond? 8 9 10 90 1,090 3 40
(3) What is the logic behind the IRR method? According to IRR, which franchises should be accepted if they are independent? Mutually exclusive? (4) Would the franchises’ IRRs change if the cost of capital changed?

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