Question

More Info Lados Company operates a chain of sandwich shops Click the icon to view additional information) (Cd Read the requirements (Cid (Cic id The company is considering two possible expansion plans. Plan A would open eight smaller shops at a cost of $8.400,000. Expected annual net cash inflows are $1,500,000 for 10 years, with zero residual value at the end of 10 years. Under Plan B, Lados Company would open three larger shops at a cost of $8.240,000 This plan is expected to generate net cash inflows of $1.020,000 per year for 10 years, the estimated useful life of the properties. Estimated residual value for Plan B is $1,000,000. Lados Company uses straight-line depreciation and requires an annual return of 6% 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, XX) Print Done Plan A Plan B Calculate the ARR (ccounting rate of return) for both plans. (Round your answers to the nearest tenth percent, X.XX.) ARR Plan A Plan B Choose from any list or enter any number in the input fields and then continue to the next question.

present value of $1 table

future value of $1 table

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Answer 1

Plan A Plan B Payback Investment/Net cash flows per annum Investment/Net cash flows per annum Investment 8400000 8240000 Cashflow per year 1500000 1020000 Payback 5.6 8.1 Average annual Profit/Average investment Average annual Profit/Average investment ARR (Intial Investment + residual value )/2 (Intial Investment + residual value)/2 Average investment Average investment 4200000 4620000 Depreciation per annum 840000 724000 Net Profit Per annum 660000 296000 ARR 15.7

NPV of Plan A Years Net Cash Inflow Annuity PV factor @ 6% Present value of annuity 1500000 7.36 10 Present value of residual PV factor Present value 11040000 0 0 Total PV cash Inflow O Initial Investment Net Present Value of Plan A 11040000 8400000 2640000 NPV of Plan B Years 1-10 Net Cash Inflow Annuity PV factor Present value of annuity 1020000 10 Present value of residual 1000000 7.36 PV factor Present value 7507200 0.558 558000 Total PV cashlnflow O Initial Investment Net Present Value of Plan A 8065200 8240000 -174800

Profitability index Present value of cash Present value of cash inflows/Initial inflows/Initial investment investment Present value of cash infl 11040000 8065200 Profitability index 1.31 0.98 Requirement 2 Answers 1 NPV 2 Payback 3 ARR 4 Profitability index Requirement 3 Answers 1 Plan A 2 5.6 years 15.70% 2640000 1.31

Present value of cash inflow Initial Investment Net Present Value of Plan A Annuity PV factor @ 12% Present value Annuity PV factor @ 13% Present value 5.65 8475000 5.426 8139000 8400000 8400000 75000 -261000 IRR Lower Rate +(NPV at Lower Rate * Difference between higher and lower rate / (NPV of lower rate - NPV of Higher rate) 12+ ( 75000*1)/(75000-(-261000)) IRR IRR 12.20%