Net present value?!?!?
IHOP Corporation franchises breakfast-oriented restaurants throughout North Amer¬ica. The average development costs for a new restaurant were reported by IHOP as follows:
Land7,000
Building800,000
Equipment341,000
Site improvements185,000
Total,993,000
IHOP develops the restaurant properties. IHOP indicates that the franchisee pays an initial franchise fee of 0,000 for a newly developed restaurant. IHOP also re¬ceives revenues from the franchisee as follows: (1) a royalty equal to 4.5% of the restaurant’s sales; (2) income from the leasing of the restaurant and related equip¬ment; and (3) revenue from the sale of certain proprietary products, primarily pan¬cake mixes.
IHOP reported that franchise operators earned annual revenues averaging ,500,000 per restaurant. Assume that the net cash flows received by IHOP for lease payments and sale of proprietary products (items 2 and 3 above) average 5,000 per year per restaurant, for ten years. Assume further that the franchise operator can purchase the property for 0,000 at the end of the lease term.
Determine IHOP’s net present value for a new restaurant, assuming a 10-year life, no change in annual revenues, and a 10% desired rate of return.
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This is a job for a financial calculator such as an HP-12C. You can push the buttons as well as I can.