Reference no: EM132960778

The year 2022 now needs to be considered even before the business is launched. CompuTech could decide to expand its business. They have the choice of taking out a competitor in their community and expanding their market presence or they can open a second business which is a franchise opportunity.

In the first option the takeover cost would be an investment of $300,000 and would result in direct net cash flow of $60,000 per year beginning in the second year of ownership. No net cash flow is expected in the first year as takeover expenses would offset any proceeds. It is estimated that the business being acquired could have a residual value of $200,000 in the 10th year.

This second option involves franchising at a cost of $75,000 per year with the potential to bring in $100,000 of net cash flow in each year, beginning in year 2. No proceeds are forecast in year 1. The franchise would run for only 8 years.

Problem 1 : If the CompuTech cost of capital is 7% which of the options available to the Martins would you consider recommending? Remember to do a NPV calculation, a Payback calculation, and an IRR calculation to support your answer.