LaposLapos operates a chain of sandwich shops. The company is considering two po
ID: 2476166 • Letter: L
Question
LaposLapos operates a chain of sandwich shops. The company is considering two possible expansion plans. Plan A would open eight smaller shops at a cost of $ 8 comma 700 comma 000$8,700,000. Expected annual net cash inflows are $ 1 comma 625 comma 000$1,625,000, with zero residual value at the end of 1010 years. Under Plan B, LaposLapos would open three larger shops at a cost of $ 8 comma 250 comma 000$8,250,000. This plan is expected to generate net cash inflows of $ 1 comma 080 comma 000$1,080,000 per year for 1010 years, the estimated useful life of the properties. Estimated residual value for Plan B is $ 990 comma 000$990,000. LaposLapos uses straight-line depreciation and requires an annual return of 99%. LOADING... (Click the icon to view the Present Value of $1 table.) LOADING... (Click the icon to view the Present Value of Annuity of $1 table.) LOADING... (Click the icon to view the Future Value of $1 table.) LOADING... (Click the icon to view the Future Value of Annuity of $1 table.) Requirements 1. Compute the payback, the ARR, the NPV, and the profitability index of these two plans. 2. What are the strengths and weaknesses of these capital budgeting methods? 3. Which expansion plan should LaposLapos choose? Why? 4. Estimate Plan A's IRR. How does the IRR compare with the company's required rate of return? Requirement 1. Compute the payback, the ARR, the NPV, and the profitability index of these two plans. Calculate the payback for both plans. (Round your answers to one decimal place, X.X.) / = Payback Plan A / = years Plan B / = y
Explanation / Answer
Answer:Requirement 1: Plan A
Plan B
Plan A is choose
Required return 9% Year Cash Flow Cumulative cash Flow 0 -8700000 -8700000 1 2495000 -6205000 2 2495000 -3710000 3 2495000 -1215000 4 2495000 1280000 5 2495000 3775000 6 2495000 6270000 7 2495000 8765000 8 2495000 11260000 9 2495000 13755000 10 2495000 16250000 NPV 7312055.96 ARR 18.68% PI 1.84 Payback period 3.48 years IRR 26%Related Questions
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