Question

1 More Info 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) Amount invested Expected not cash flow Plan 5450000 1525000 Plan B 8150000 11100000 . The company is considering the possible o n Pan would ghtmarshops at a cost of $8.450 000 E u o 51525.000 for 10 year with ori e nd of years. Under Pan B. Locos Compary would open we were to SE150.000 This plan is expected to generate nel cash flows of $1.100.000 per year for 10 years, the estimated useful life of the properties. Estimated residual value for B a $1.300.000. Locos Company recomand a annual rotum of Calculate the ARR (accounting rate of return) for both plans. (Round your answers to the nearest tenth percent, XXS) Average annual Operating income Average amount invested ARR Plan Print Done bot e Caculate the NPV int present Value of each plan. Begin by calling the NPV of amounts to the decimal plac XXX Usparenthor s son for a negative Complete present ) Plan A: Net Cash Annuity PV Factor PV Factor Choose from any or anterary number in the input fields and then continue to the next question

Answer 1

Computations of payback periods:

	Amount Invested	/	Expected annual net cash flow	=	Payback
Plan A	$8,450,000	/	$1,525,000	=	5.5	Years
Plan B	$8,150,000	/	$1,100,000	=	7.4	Years

Computations of ARR:

	Average annual operating income	/	Average amount invested	=	ARR
Plan A	$680,000	/	$4,225,000	=	16.1 %
Plan B	$415,000	/	$4,725,000	=	8.8 %

Computation of Average annual operating income and Average amount invested:

Plan A:

Annual Depreciation = Initial cost/Useful life = $ 8,450,000/10 = $ 845,000

Average annual operating income = Annual cash flow – Depreciation

= $ 1,525,000 - $ 845,000 = $ 680,000

Average amount invested = (Beginning book value + Ending book value)/2

                                             = ($ 8,450,000 + $ 0)/2 = $ 8,450,000/2 = $ 4,225,000

Plan B:

Annual Depreciation = (Initial cost - Salvage value)/Useful life

                                     = ($ 8,150,000 - $ 1,300,000)/10 = $ 6,850,000 /10 = $ 685,000

Average annual operating income = Annual cash flow – Depreciation

= $ 1,100,000 - $ 685,000 = $ 415,000

Average amount invested = (Beginning book value + Ending book value)/2

                                             = ($ 8,150,000 + $ 1,300,000)/2 = $ 9,450,000 /2 = $ 4,725,000

Computation of NPV:

Plan A: Years		Net Cash Inflow	Annuity PV Factor (i = 8 %, n = 10)	PV Factor (i = 8 %, n = 10)	Present Value
1-10	Present value of annuity	$1,525,000	6.710		$10,232,750
10	Present value of residual value	0		0.463	$0
	Total PV of cash inflows				$10,232,750
0	Initial Investment				$8,450,000
	Net present value of Plan A				$1,782,750

Plan B: Years		Net Cash Inflow	Annuity PV Factor (i = 8 %, n = 10)	PV Factor (i = 8 %, n = 10)	Present Value
1-10	Present value of annuity	$1,100,000	6.710		$7,381,000
10	Present value of residual value	$1,300,000		0.463	$601,900
	Total PV of cash inflows				$7,982,900
0	Initial Investment				$8,150,000
	Net present value of Plan A				($167,100)

Computation of Profitability index:          

	Present Value of Future Cash Flow	/	Initial Investment	=	Profitability Index
Plan A	$10,232,750	/	$8,450,000	=	1.21
Plan B	$7,982,900	/	$8,150,000	=	0.98