On July 1, 2018, Ed Wynne signed an agreement to operate as a franchisee of Kwik Foods, Inc., for an initial franchise fee of £240,000. Of this amount, £80,000 was paid when the agreement was signed and the balance is payable in four equal annual payments of £40,000 beginning July 1, 2019. The agreement provides that the down payment is not refundable and no future services are required of the franchisor. Wynne's credit rating indicates that he can borrow money at 14% for a loan of this type. Information on present and future value factors is as follows:

Question

Quizplus · Accepted Answer

The initial franchise fee of £240,000 is composed of a £80,000 down payment and four annual payments of £40,000. The present value of these future payments must be calculated using the 14% interest rate to determine the total cost of the franchise at the time of the agreement. The down payment is already in present value terms, so only the future payments need to be discounted. The correct answer reflects the sum of the down payment and the present value of the future payments, which is £196,400. This accounts for the time value of money, indicating that future payments are worth less in today's terms when discounted at the borrower's borrowing rate.

On July 1, 2018, Ed Wynne Signed an Agreement to Operate