1. Define the term internal rate of return (IRR). What is each franchise’s IRR?
The internal rate of return (IRR) is a metric used in financial analysis to estimate the
profitability of potential investments. IRR is a discount rate that makes the net present
value (NPV) of all cash flows equal to zero in a discounted cash flow analysis.
Formula and Calculation for IRR
0 = 𝑁𝑃𝑉 = ∑𝐶𝑡
(1+𝐼𝑅𝑅)𝑡+𝐶0
𝑇
𝑡=1
where:
Ct = Net cash inflow during the period t
C0 = Total initial investment costs
IRR = The internal rate of return
t = The number of time periods
Franchise L’s IRR: 0= 10
1+IRR+ 60
(1+IRR)2 + 80
(1+IRR)3 − 100
