P26-7A Crystal's Candle Shop is considering two possible expansion plans. Plan A is to open 8 candle
Question:
P26-7A Crystal's Candle Shop is considering two possible expansion plans. Plan A is to open 8 candle shops at a cost of $3,220,000. Expected annual net cash inflows are $690.000, with residual value of $350,000 at the end of seven years. Under plan B. Crystal's would open 12 candle shops at a cost of $4,200,000. This investment is expected to generate net cash inflows of $1.050.000 each year for seven years, which is the estimated useful life of the properties. Estimated residual value of the plan B candle shops is zero. Crystal's uses straight-line depre- ciation and requires an annual return of 14%. Required 1. Compute the payback period, the accounting rate of return, and the net present value of each plan. What are the strengths and weaknesses of these capital budgeting models? 2. Which expansion plan should Crystal's adopt? Why? 3. Estimate the internal rate of return (IRR) for plan B. How does plan B's IRR compare with Crystal's required rate of return?
Step by Step Answer:
Accounting
ISBN: 9780130906991
5th Edition
Authors: Charles T. Horngren, Walter T. Harrison, Linda S. Bamber, Betsy Willis, Becky Jones