0 0 Mugs Inc. operates a chain of snack shops. The company is considering two possible expansion plans. Plan A would open eight smaller shops at a cost of $8,840,000. Expected annual net cash inflows are $1,700,000 with zero residual value at the end of ten years. Under Plan B, Mugs would open three larger shops at a cost of $8,640,000. This plan is expected to generate net cash inflows of $1,450,000 per year for ten years, the estimated life of the properties. Estimated residual value is $900,000. Mugs uses straight-line depreciation and requires an annual return of 8% (Click the icon to view the present value annuity factor table.) (Click the icon to view the future value annuity factor table.) Read the requirements (Click the icon to view the present value factor table) (Click the icon to view the future value factor table.) Requirement 1. Compute the payback period, the ARR, and the NPV of these two plans. What are the strengths and weaknesses of these capital budgeting models? Begin by computing the payback penod for both plans (Round your answers to one decimal place.) Plan A (in years) Plan B (in years) Now compute the ARR (accounting rate of return) for both plans. (Round the percentages to the nearest tenth percent) Plan A Plan B Next compute the NPV (not present value) under each plan. Begin with Plan A, then compute Plan B (Round your answers to the nearest whole dollar and use parentheses or a minus sign to represent a negative NPV) Net present value of Plan A Not present value of Plan B Match the term with the strengths and weaknesses listed for each of the three capital budgeting models Strengths and weaknesses Is based on cash flows, can be used to assess profitability, and takes into account the time value of money. It has none of the weaknesses of the other two models. Is easy to understand, is based on cash flows, and highlights risks. However, it ignores profitability and the time value of money. Can be used to assess profitability, but it ignores the time value of money. Requirement 2. Which expansion plan should Mugs choose? Why? Capital budgeting models Recommendation. Invest in It has the net present value. It also has a payback period Requirement 3. Estimate Plan A's IRR. How does the IRR compare with the company's required rate of return? The IRR (Internal rate of return) of Plan A is between This rate the company's hurdle rate of 8% Su Requirements 1. Compute the payback period, the ARR, and the NPV of these two plans. What are the strengths and weaknesses of these capital budgeting models? 2. Which expansion plan should Mugs choose? Why? 3. Estimate Plan A's IRR. How does the IRR compare with the company's required rate of return? Print Done Reference 13 Present Value of Annuity of $1 Periods 1% 2% 3% 4% 5% Period 1 Period 2 Period 3 Period 4 Period 5 1.970 2.941 0.990 0.980 1.942 0.971 0.962 1.913 2.884 2.829 2.775 0.952 0.943 6% 8% 10% 0.926 0.909 0.893 12% 14% 16% 18% 20% 0.877 0.862 0.847 0.833 1.886 1.859 1.833 1.783 1.736 1.690 1.647 1.605 1.566 1.528 2.723 2.673 2.577 2.487 2.402 2.322 2.246 2.174 2.106 3.902 3.808 3.717 3.630 3.546 3.465 3,312 3.170 3.037 2.914 2.798 2.690 2.589 4.853 4.713 4.580 4.452 4.329 4.212 3.993 3.791 3.605 3.433 3.274 3.127 2.991 Period 6 5.795 5.601 5.417 5.242 5.076 4.917 4.623 4.355 4.111 3.889 3.685 3.498 3.326 Period 7 Period 8 Period 9 Period 10 9.471 6.728 6.472 6.230 6.002 5.786 5.582 5.206 4.868 4.564 4.288 4.039 3.812 3.605 7.652 7.325 7.020 6.733 6.463 6.210 5.747 5.335 4.968 4.639 4.344 4.078 3.837 8.566 8.162 7.786 8.983 8.530 7.435 7.108 6.802 6.247 5.759 5.328 4.946 4.607 4.303 4.031 8.111 7.722 7.360 6.710 6.145 5.650 5.216 4.833 4.494 4.192 Period 15 13.865 Period 11 10.368 9.787 9.253 8.760 8.306 7.887 7.139 6.495 5.938) Period 12 11.255 10.575 9.954 9.385 8.863 8.384 7.536 6.814 6.194 Period 13 12.134 11.348 10.635 9.986 9.394 8.853 Period 14 13.004 12.106 11.296 10.563 9.899 9.295 8.244 7.367 6.628 12.849 11.938 11.118 10.380 9.712 8.559 7.606 6.811 5.453 5,029 4.656 4.327 5.660 5.197 4.793 4.439 7.904 7.103 6.424 5.842 5.342 4.910 4.533 6.002 5.468 5.008 4.611 6.142 5.575 5.092 4.675 Period 20 18.046 16.351 14.877 13.590 12.462 11.470 9.818 8.514 Period 25 22.023 19.523 17 413 15.622 14.094 12.783 10.675 9.077 Period 30 25.808 22.396 19.600 17.292 15.372 13.765 11.258 9.427 Period 40 32.835 27.355 23.115 19.793 17.159 15.046 11.925 9,779 7.469 6.623 5.929 5.353 4.870 7.843 6.873 6.097 5.467 4.948 8.055 8.244 7.003 6.177 5.517 4.979 7.105 6.233 5.548 4.997 Reference Future Value of Annuity of $1 Periods 1% 2% 3% 4% 5% 6% 8% 10% 12% 14% 16% 18% 20% Period 1 1,000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 Period 2 2.010 2.020 2.030 2.040 2.050 2.060 2.080 2.100 2.120 2140 2.160 2.180 2.200 Period 3 3.030 3.060 3.091 3.122 3.153 3.184 3.246 3.310 3.374 3.440 3.506 3.572 3.640 Period 4 4.060 4.122 4.184 4.246 4.310 4.375 Period 5 5.101 5.204 5.309 5.416 5.526 4.641 4.506 4.779 5.637 5.867 6.105 6.353 6.610 4.921 5.066 5.215 5.368 6.877 7.154 7.442 Period 6 6.152 6.308 6.468 6.633 Period 7 7.214 7.434 Period 8 8.286 Period 9 9.369 Period 10 Period 11 Period 12 7.336 7.716 7.662 7.898 8.923 9.487 8.583 8.892 9.214 10.637 11.436 12.300 9.755 10.159 10.583 11.027 11.491 12.488 13.579 10.462 10.950 11.464 12.006 12.578 13.181 14.487 15.937 17.549 6.802 6.975 8.142 8.394 9.897 9.549 8.115 8.536 8.977 9.442 9.930 10.089 10.730 11.414 12.142 12.916 13.233 14.240 15.327 16.499 14.776 16.085 17.519 19.086 20.799 19.337 21.321 23.521 25.959 Period 13 Period 14 Period 15 Period 20 Period 25 Period 30 Period 40 11.567 12.169 12.808 13.486 14.207 14.972 16.645 12.683 13.412 14.192 15.026 15.917 16.870 18.977 13.809 14.680 15.618 16.627 17.713 18.882 21.495 24.523 28.029 14.947 15.974 17.086 18.292 19.599 21.015 24.215 27.975 32.393 16.097 17.293 18.599 20.024 21.579 23.276 27.152 31.772 37.280 22.019 24.297 26.870 29.778 33.066 36.786 45.762 57,275 72.052 28.243 32.030 36.459 41.646 47.727 54.865 73.106 98.347 133.334 181.871 34.785 40 568 47.575 56.085 66.439 79.058 113.283 164.494 241.333 356.787 48.886 60.402 75.401 95.026 120.800 154.762 259 057 442.593 767 091 1,342 025 2,360.757 4,163 213 7,343.858 18.531 20.655 21 384 24.133 23.045 25.733 28.755. 32 150 27.271 30.850 34.931 39.581 32.089 36.786 42.219 48.497 37.581 43.842 43.672 50.818 59.196 51.660 60.965 72.035 91.025 115.380 249.214 530.312 146.628 186.688 342.603 790 948 1,181.882 471.981 Print Done - Reference Present Value of $1 Periods 1% 2% 3% 4% 5% 6% Period 1 0.990 0.980 0.971 0.962 0.952 Period 2 0.980 0.961 0.943 0.925 Period 3 0.942 0.915 0.971 0.889 0.864 Period 4 0.961 0.924 0.888 0.855 0.823 Period 5 0.951 0.906 0.863 0.822 0.784 0.907 0.890 0.857 0.826 0.797 0.840 0.794 0.751 0.712 0.792 0.735 0.683 0.636 0.747 0.681 0.567 16% 20% 18% 12% 14% 8% 10% 0.943 0.926 0909 0.893 0.877 0.862 0.847 0.833 0.769 0.743 0.718 0.694 0.621 0.675 0.592 0.519 0.476 0.437 0.641 0.609 0.579 0.552 0.516 0.482 0.402 Period 6 0942 0.888 0.837 0.790 0.746 Period 7 0.933 0.871 0.813 0.760 Period 8 0.923 0.853 0.789 0.731 Period 9 0.914 0.837 0.766 0.711 0.677 0.703 0.645 Period 10 0.905 0.820 0.744 0.676 0.614 0.463 0.386 0.322 0.705 0.630 0.564 0.507 0.456 0.665 0.583 0.513 0.452 0.400 0.354 0.627 0.540 0.467 0.404 0.592 0.500 0.424 0.361 0.558 0.410 0.370 0.335 0.314 0.279 0.351 0.305 0.266 0.233 0.308 0.263 0.225 0.194 0.270 0.227 0.191 0.162 Period 11 0.896 0.804 Period 12 0.887 0.788 0.722 0.650 0.701 0.585 0.527 0.429 0.350 0.287 0.237 0.195 0.162 0.135 0.625 0.557 0.497 0.397 0.319 0.257 Period 13 0.879 Period 14 0.870 0.773 0.758 0.661 0.681 0.601 0.530 0.469 0.577 0.505 Period 15 0.861 0.743- 0.642 0.555 0.481 0.442 0.417 Period 20 0.820 0.673 0.554 0.456 0.377 Period 25 0.780 0.610 0.478 0.375 0.295 Period 30 0.742 0.552 0.412 0.308 Period 40 0.672 0.453 0.307 0.208 0.368 0.290 0.229 0.340 0.263 0.205 0.315 0.239 0.183 0.312 0.215 0.149 0.104 0.233 0.146 0.092 0.059 0.231 0.174 0.099 0.057 0.033 0.142 0.097 0.046 0.022 0.011 0.208 0.168 0.137 0.093 0.182 0.145 0.116 0.160 0.125 0.099 0.078 0.140 0.108 0.084 0.065 0.073 0.051 0.037 0.026 0.038 0.024 0.016 0.010 0.020 0.012 0.007 0.004 0.005 0.003 0.001 0.001 0.112 Reference Future Value of $1 Periods 1% 2% 3% 4% 5% 6% 8% 10% 12% Period 1 1.010 1.020 1.030 1.040 1.050 1.060 Period 2 1.020 1.040 1.061 1.082 1.103 1.124 1.166 Period 3 1.030 1.061 1.093 1.125 1.158 1.191 1.260 Period 4 1.041 1.082 1.126 1.170 Period 5 1.051 1.104 1.159 1.217 1.080 1.100 1,210 1.331 1.216 1.262 1.360 1.464 1.276 1.338 1.469 14% 1.120 1.140 1.254 1,300 16% 18% 20% 1.180 1.160 1.200 1.346 1.392 1.440 1.405 1.482 1.561 1.643 1.728 1,574 1.689 1.811 1.939 2.074 1.611 1,762 1.925 2.100 2.288 2.488 Period 6 1.062 1.126 1.194 Period 7 1.072 1.149 1.230 1.316 Period 8: 1.083 1.172 1.267 1.369 Period 9 1.094 1.195 1.305 Period 10 1.105 1.219 1.344 Period 11 1.116 1,243 Period 12 1.127 1.268 Period 13 1.138 1.294 1.469 1.665 Period 14 1.149 1.319 1.513 1.732 Period 15 1.161 1.346 1.558 1.801 Period 20 1.220 1.486 1.806 2.191 Period 25 1.282 1.641 2.094 2.666 Period 30 1.348 1.811 2.427 3.243 Period 40 1.489 2.208 3.262 4.801 1.265 1.340 1.419 1.587 1.772 1.407 1.504 1.714 1.949 2.211 1.477 1.594 1.851 2.144 2.476 1.423 1.551 1.689 1.999 2.358 2.773 3.252 1.480 1.629 1.791 2.159 2.594 3.106 3.707 1.384 1.539 1.710 1.898 2.332 2.853 3.479 4.226 5.117 6.176 7.430 1.426 1.601 1.796 2.012 2.518 3.138 3.896 4.818 5.936 7.288 8.916 1.886 2.133 2.720 3.452 4.363 5.492 6.886 8.599 10.699 1.980 2.261 2.937 3.797 4.887 6.261 7.988 10.147 12.839 2.079 2.397 3.172 4.177 5.474 7.138 9.266 11.974 15.407 2.653 3.207 4.661 6.727 9.646 13.743 19.461 27.393 38.338 3.386 4.292 6.848 10.835 17.000 26.462 40.874 62.669 95,396 4.322 5.743 10.063 17.449 29.960 50.950 85.850 143.371 237.376 7.040 10.286 21.725 45.259 93.051 188.884 378.721 750.378 1,469.772 1.974 2.195 2.436 2.700 2.986 2.502 2.826 3.185 3.583 2.853 3.278 3.759 4.300 3.803 4.435 5.160 4.411 5.234 6.192