Mitchell purchased a franchise agreement to distribute electronic gadgets for 7 years. The agreement cost $2,200,000 and he had to make investments of $875,000 for the first 2 years to set up his showroom. The franchise generated $1,025,000 in profits each year from the 1st year to 7 years afterwards. At the end of year 7, he sold the furniture in his showroom for $120,000.

Mitchell purchased a franchise agreement to distribute electronic gadgets for 7 years. The agreement cost $2,200,000 and he had to make investments of $875,000 for the first 2 years to set up his showroom. The franchise generated $1,025,000 in profits each year from the 1st year to 7 years afterwards. At the end of year 7, he sold the furniture in his showroom for $120,000.

SWFT Essntl Tax Individ/Bus Entities 2020

23rd Edition

ISBN:9780357391266

Author:Nellen

Publisher:Nellen

Chapter18: Comparative Forms Of Doing Business

Section: Chapter Questions

Problem 1BD

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Jordan purchased a franchise agreement to distribute electronic gadgets for 8 years. The agreement cost $1,600,000 and she had to make investments of $875,000 for the first 2 years to set up her showroom. The franchise generated $1,050,000 in profits each year from the 1st year to 8 years afterwards. At the end of year 8, she sold the furniture in her showroom for $105,000. (5marks) a. What is the Internal Rate of Return (IRR)? b. Should she have proceeded with this plan if her cost of capital was 19% ? .
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