Question

(Click the icon to view Present Value of $1 table.) Lulus Company operates a chain of sandwich shops. (Click the icon to view additional information.) C Read the requirements. (Click the icon to view Present Value of Ordinary Annuity of $1 table.) (Click the icon to view Future Value of $1 table.) C (Click the icon to view Future Value of Ordinary Annuity of $1 table.) 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.) i More Info Payback Plan A years Plan B years Calculate the ARR (accounting rate of return) for both plans. (Round your answers to the nearest tenth percent, X.X%.) The company is considering two possible expansion plans. Plan A would open eight smaller shops at a cost of $8,410,000. Expected annual net cash inflows are $1,550,000 for 10 years, with zero residual value at the end of 10 years. Under Plan B. Lulus Company would open three larger shops at a cost of $8.100,000. This plan is expected to generate net cash inflows of $1,090,000 per year for 10 years, the estimated useful life of the properties. Estimated residual value for Plan B is $1,000,000. Lulus Company uses straight-line depreciation and requires an annual return of 9%. ARR Plan A Plan B % Print Done decimal places, X.XXX. Use Caclulate the NPV (net present value) of each plan. Begin by calculating the NPV of Plan A. (Complete all answer boxes. Enter a "0" for parentheses or a minus sign for a negative net present value.) Plan A: Net Cash Inflow Annuity PV Factor (i=9%, n=10) PV Factor (i=9%, n=10) Present Value Years 1 - 10 Present value of annuity

Answer 1

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Part 1
		Plan A	Plan B
Amount invested	a	$                       8,410,000	$                          8,100,000
Expected annual nat cash inflow	b	$                       1,550,000	$                          1,090,000
Payback Period	a/b	5.43	7.43	Years
ARR
		Plan A	Plan B
Average annual net cash inflow		$                       1,550,000	$                          1,090,000
Less: Depreciation
$8,410,000/10 Years		$                        (841,000)	$                            (710,000)
($8,100,000-$1,00,000)/10 Years
Net Income	a	$                          709,000	$                              380,000
Average Investment	b	$                       4,205,000	$                          4,550,000
($8,410,000+0)/2
($8,100,000+$1,00,000)/2
ARR	a/b	16.86%	8.35%
NPV
		PV factor at
		i = 9%, n= 10
		Net Cash Inflow	Total Present Value
Plan A:
Present value of annuity of equal
annual net cash inflows for
10 years at 9%	$1,550,000*6.418		$                          9,947,900
Present value of residual value			$                                          -
Investment			$                        (8,410,000)
Net present value of Plan A			$                          1,537,900
Plan B:
Present value of annuity of equal
Annual net cash inflows for
10 years at 9%	$1,090,000*6.418		$                          6,995,620
Present value of residual value	$1,000,000*0.422		$                              422,000
Investment			$                        (8,100,000)
Net present value of Plan B			$                            (682,380)
Profitability Index	a	b	a/b
	PV of cash inflow	Initial investment	PI
Plan A	$                                                    9,947,900	$                       8,410,000	1.18
Plan B	$                                                    7,417,620	$                       8,100,000	0.92
Strength/weekness:
Profitability Index
Payback Period
ARR
NPV