AAFM CWM_LEVEL_2 Exam - Topic 2 Question 72 Discussion

Actual exam question for AAFM's CWM_LEVEL_2 exam

Question #: 72
Topic #: 2

Section C (4 Mark)

Read the senario and answer to the question.

During identification of new business opportunities, one of Harish's friends Shekhar has offered him a business proposal. In this proposal a partnership firm consisting of two partners, Harish and Shekhar, shall take the franchise of a company which is a reputed brand in the field of pathology lab in which their investment and profit sharing ratio shall be equal.

Franchise rights shall be valid for 5 years and the project requires an upfront investment of Rs. 25 lakh for required infrastructure. The franchisee agreement has an option that the company can take over the franchisee after 5 years by charging depreciation @15% p.a. on straight line basis.

The projected profits from the firm are as follows:

Harish wants to know what IRR he will earn on his investment from this project ? (Please ignore taxes and assuming no additional investment is made during this five year period)

A8.20%

B5.17%

C12.27%

D7.82%

Show Suggested Answer

Suggested Answer: A

by Devora at Mar 04, 2024, 12:12 PM

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Cassi

9 months ago

Totally agree, 12.27% sounds too high for this setup!

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Diego

10 months ago

Wait, can the company really take over after 5 years?

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Angelo

10 months ago

5 years is a short time for a franchise deal.

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Sheron

10 months ago

I think the IRR is around 8.20%.

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Ashanti

10 months ago

The upfront investment is Rs. 25 lakh.

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Phuong

11 months ago

I think I recall that the IRR is usually lower than the average return. I’m leaning towards option D, but I’m not entirely confident.

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Rashida

11 months ago

I’m a bit confused about how to factor in the upfront investment and the projected profits. I hope I can remember the formula correctly.

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Loise

11 months ago

This seems similar to a practice question we did on franchise investments. I think the IRR should be around 8% based on the cash flows.

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Nobuko

11 months ago

I remember we practiced calculating IRR, but I’m not sure how to apply it with the depreciation factor included.

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Toshia

11 months ago

Wait, what's the straight-line depreciation on the initial investment? I need to make sure I'm accounting for that properly in the cash flows.

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Naomi

11 months ago

Hmm, I'm a bit unsure about how to handle the franchise takeover option after 5 years. Do I need to factor that into the cash flows somehow?

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Camellia

11 months ago

This looks like a straightforward IRR calculation problem. I'll start by finding the net cash flows for each year, then use a financial calculator or spreadsheet to solve for the IRR.

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Reed

11 months ago

Okay, I think I've got this. I'll calculate the present value of the projected profits, add the residual value at the end, and then solve for the discount rate that makes the net present value zero. That should give me the IRR.

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Yuette

11 months ago

Okay, I think I get it - we need to set the metrics beforehand so we don't just pick the ones that make our results look good after the fact.

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Susy

11 months ago

Wait, I'm a bit confused. Do we need to consider both the format and the existence in the official list as separate partitions? Or is it just one partition for the valid format?

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Helene

11 months ago

Okay, I've got this. The definition is clearly asking about the relationship between an exposure and an outcome, so I'm going to go with relative risk as the best answer.

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Fallon

12 months ago

This is a good question to test our knowledge of stair construction details. I'm pretty confident the correct answers are A, C, and possibly B, but I'll review my notes just to be sure.

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