Wally president of Wallys Burgers is considering franchising

Wally, president of Wally\'s Burgers, is considering franchising. He has a potential franchise agreement that would allow him to receive 13 end-of-year payments starting one year from now. The first two payments would be $26,000 and $23,000 in one and two years respectively, and then $19,000 per year after that for 11 years. If Wally requires a return of 9.9%, what is the present value of this stream ofcash flows? What is the present value of this stream of cash flows?

Solution

Present Value = Sum of present value of future cash flows

Present value = 26000/(1+9.9%)^1 + 23000/(1+9.9%)^2 + 19000/(1+9.9%)^3 + 19000/(1+9.9%)^4 + 19000/(1+9.9%)^5 + + 19000/(1+9.9%)^6 + + 19000/(1+9.9%)^7 + 19000/(1+9.9%)^8 + 19000/(1+9.9%)^9 + 19000/(1+9.9%)^10 + 19000/(1+9.9%)^11 + 19000/(1+9.9%)^12 + 19000/(1+9.9%)^13

Present Value = $145,347.07

OR can be solved as below:

Year

Cash Flow = CF

CF/(1+9.9%)^Year

                        1.00

              26,000.00

                 23,657.87

                        2.00

              23,000.00

                 19,042.87

                        3.00

              19,000.00

                 14,313.98

                        4.00

              19,000.00

                 13,024.55

                        5.00

              19,000.00

                 11,851.28

                        6.00

              19,000.00

                 10,783.69

                        7.00

              19,000.00

                   9,812.28

                        8.00

              19,000.00

                   8,928.37

                        9.00

              19,000.00

                   8,124.08

                      10.00

              19,000.00

                   7,392.25

                      11.00

              19,000.00

                   6,726.34

                      12.00

              19,000.00

                   6,120.42

                      13.00

              19,000.00

                   5,569.08

Total

               145,347.07

Year	Cash Flow = CF	CF/(1+9.9%)^Year
1.00	26,000.00	23,657.87
2.00	23,000.00	19,042.87
3.00	19,000.00	14,313.98
4.00	19,000.00	13,024.55
5.00	19,000.00	11,851.28
6.00	19,000.00	10,783.69
7.00	19,000.00	9,812.28
8.00	19,000.00	8,928.37
9.00	19,000.00	8,124.08
10.00	19,000.00	7,392.25
11.00	19,000.00	6,726.34
12.00	19,000.00	6,120.42
13.00	19,000.00	5,569.08
	Total	145,347.07