Gorgeous George is evaluating a five-year investment in an oil-change franchise,which costs $120,000 paid up front.Projected net operating cash flows are $60,000 per year.If Gorgeous George buys shares instead of the franchise,he expects an annual return of 12%.Which is true?

Question

Quizplus · Accepted Answer

To calculate the net present value (NPV) of the franchise investment, use the formula:

NPV = Present value of expected cash inflows - Initial investment

For this investment, the present value of expected cash inflows is:

PV = $60,000 x [(1 - (1 + r)^-n) / r]

where r is the discount rate (12%), n is the number of years (5), and the bracketed part of the equation is the present value factor. Plugging in the numbers:

PV = $60,000 x [(1 - (1 + 0.12)^-5) / 0.12] = $239,712.18

So the net present value is:

NPV = $239,712.18 - $120,000 = $119,712.18

Therefore, the correct answer is D, and the net present value of the franchise investment is $96,287.

Gorgeous George Is Evaluating a Five-Year Investment in an Oil-Change