Wally, president of Wally's Burgers, is considering franchising. He has a potential franchise agreement that would see him receive 13 end-of-year payments starting one year from now. The first two payments would be $30,000 and $25,000 in one and two years respectively, and then $21,000 per year after that for 11 years.  If Wally requires a return of 6%, what is the present value of this stream of cash flows?


To find the present value (PV) of the stream of cash flows Wally is considering, we can use the formula for the present value of each individual cash flow and then sum them up. The present value (PV) of a future payment is calculated as:

\[
PV = \frac{C}{(1 + r)^t}
\]

where:
- $ C $ is the cash flow in the future.
- $ r $ is the required rate of return (6% or 0.06).
- $ t $ is the time in years.

### Step-by-Step Breakdown:

1. **First cash flow: $30,000 in 1 year.**
   \[
   PV_1 = \frac{30,000}{(1 + 0.06)^1} = \frac{30,000}{1.06}
   \]

2. **Second cash flow: $25,000 in 2 years.**
   \[
   PV_2 = \frac{25,000}{(1 + 0.06)^2} = \frac{25,000}{(1.06)^2}
   \]

3. **Next 11 cash flows of $21,000 per year from year 3 to year 13.**
   For each of these payments, we calculate the present value at the time $ t $, ranging from 3 to 13.

   \[
   PV_3 = \frac{21,000}{(1 + 0.06)^3}, \quad PV_4 = \frac{21,000}{(1 + 0.06)^4}, \quad \ldots , \quad PV_{13} = \frac{21,000}{(1 + 0.06)^{13}}
   \]

Finally, we sum all these present values to get the total present value of the cash flow stream.

Let me calculate this for you.The present value of the stream of cash flows is approximately **$197,956.89**.

Would you like more details or have any questions?

Here are some related questions:
1. How does the rate of return affect the present value of cash flows?
2. What happens if the payments were to start immediately instead of one year from now?
3. How would the present value change if the payments increased over time?
4. What is the formula for calculating the present value of an annuity?
5. How can different discount rates be used in business valuations?

**Tip:** The earlier a cash flow is received, the higher its present value due to less discounting over time.

Wally, president of Wally's Burgers, is considering franchising. He has a potential franchise agreement that would see him receive 13 end-of-year payments starting one year from now. The first two payments would be $30,000 and $25,000 in one and two years respectively, and then $21,000 per year after that for 11 years. If Wally requires a return of 6%, what is the present value of this stream of cash flows?

Learn how to calculate the present value of a franchise agreement's cash flow stream, which includes varying payments of $30,000 in year 1, $25,000 in year 2, and $21,000 annually for the next 11 years, assuming a 6% return rate. This step-by-step solution covers essential finance concepts such as time value of money and discounting cash flows.

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