Robert Rhodes has $650,000 to invest and is considering two opportunities, a franchise for a fast food outlet and an apartment building. he expects to retire in 8 years at which point he'd want to sell. He has given you the following information:
* Franchise:
- The intial franchise fee is $250,000.
- He would have to purchase equipment costing $250,000 to equip the outlet and invest an additional $150,000 for inventories and other working capital needs.
- Other outlets in the fast-food chain have an annual cash inflow of about $160,000.
- Mr. Roberts would close (shut down) the outlet in 8 years.
- At closing, the equipment could be sold for about 10% of its original cost. The franchise agreement is non-transferable (couldn't be sold).
* Apartment bulding:
- The building he's looking at costs $3,000,000. He would put $600,000 down and finance the $2,400,000 balance with a 8 year note. The annual mortgage payment would be $386,485.
- There would be an additional $50,000 in closing costs.
- There are 30 apartments in the building. Similar apartments in the area rent for $12,000 per year.
- Annual operating costs are expected to run $75,000.
- Although the building was recently remodeled, Roberts expects that there will be additional remodeling, at a cost of $200,000, in Year 4.
- Mr Rhodes plans to sell the apartment building in 8 years for $4,000,000.
* Mr Rhodes' require rate of return is 16%.
a) Determine the present value of each of the investment alternatives. Based on that analysis alone, which investment would you advise Mr Rhodes to choose?
b) Name on factor you think Mr Rhodes should consider when making his choice that doesn't involve present value calculations.