3 11. Lolas Company operates a chain of sandwich shops. (Click the icon to view additional information.) Read the requirements (Click the icon to view Present Value of $1 table.) (Click the icon to view Present Value of Ordinary Annuity of $1 table.) (Click the icon to view Future Value of $1 table.) (Click the icon to view Future Value of Ordinary Annuity of $1 table.) 5 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, X.X.) (1) + (2) = Payback Plan A years Plan B B + = years Calculate the ARR (accounting rate of return) for both plans. (Round your answers to the nearest tenth percent, X.X%.) (3) (4) ARR Plan A = % Plan B % 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 any zero balances or amounts that do not apply to the plan. Enter any factor amounts to three decimal places, X.XXX. Use parentheses or a minus sign for a negative net present value.) Plan A: Net Cash Annuity PV Factor PV Factor Present Years Inflow (i=8%, n=10) (i=8%, n=10) Value 1 - 10 Present value of annuity 10 Present value of residual value Total PV of cash inflows 0 Initial Investment Net present value of Plan A Calculate the NPV of Plan B. (Complete all answer boxes. Enter a "0" for any zero balances or amounts that do not apply to the plan. Enter any factor ar Prir three decimal places, X.XXX. Use parentheses or a minus sign for a negative net present value.) Plan B: Net Cash Annuity PV Factor PV Factor Present Years Inflow (i=8%, n=10) (i=8%, n=10) Value 1 - 10 Present value of annuity Present value of residual value Total PV of cash inflows Initial Investment 10 0 Net present value of Plan B Calculate the profitability index of these two plans. (Round to two decimal places X.XX.) (5) (6) Plan A = Profitability index Plan B Requirement 2. What are the strengths and weaknesses of these capital budgeting methods? Match the term with the strengths and weaknesses listed for each of the four capital budgeting models. Capital Budgeting Method Strengths/Weaknesses of Capital Budgeting Method (7) 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 models. (8) Is easy to understand, is based on cash flows, and highlights risks. However, it ignores profitability and the time value of money. (9) Can be used to assess profitability, but it ignores the time value of money. (10) It allows us to compare alternative investments in present value terms and it also accounts for differences in the investments' initial cost. It has none of the weaknesses of the other models. Requirement 3. Which expansion plan should Lolas Company choose? Why? ARR, a Lolas Company should invest in (11) because it has a (12) payback period, a (13) (14) net present value, and a (15). profitability index. Requirement 4. 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 (16) - This rate (17) the company's hurdle rate of 8%. 1: More Info The company is considering two possible expansion plans. Plan A would open eight smaller shops at a cost of $8,440,000. 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, Lolas Company would open three larger shops at a cost of $8,300,000. This plan is expected to generate net cash inflows of $1,070,000 per year for 10 years, the estimated useful life of the properties. Estimated residual value for Plan B is $1,300,000. Lolas Company uses straight-line depreciation and requires an annual return of 8%. 2: Requirements 1. Compute the payback, the ARR, the NPV, and the profitability index of these two plans. 2. What are the strengths and weaknesses of these capital budgeting methods? 3. Which expansion plan should Lolas Company choose? Why? 4. Estimate Plan A's IRR. How does the IRR compare with the company's required rate of return? Present Value of $1 Periods Period 1 Period 2 Period 3 Period 4 Period 5 1% 2% 3% 4% 5% 6% 7% 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.951 0.906 0.863 0.822 0.784 0.747 0.713 8% 0.926 0.857 0.794 0.735 0.681 9% 10% 12% 14% 15% 16% 18% 20% 0.917 0.909 0.893 0.877 0.870 0.862 0.847 0.833 0.842 0.826 0.797 0.769 0.756 0.743 0.7180.694 0.772 0.751 0.712 0.675 0.658 0.641 0.609 0.579 0.708 0.683 0.636 0.592 0.572 0.552 0.516 0.482 0.650 0.621 0.567 0.519 0.497 0.476 0.437 0.402 Period 6 0.942 0.888 0.837 0.790 0.746 0.705 Period 7 0.933 0.871 0.813 0.760 0.711 0.665 Period 8 0.923 0.853 0.789 0.731 0.677 0.627 Period 9 0.914 0.837 0.766 0.703 0.645 0.592 Period 10 0.905 0.820 0.744 0.676 0.614 0.558 0.666 0.623 0.582 0.544 0.508 0.630 0.583 0.540 0.500 0.463 0.596 0.564 0.507 0.456 0.432 0.410 0.370 0.335 0.547 0.513 0.452 0.400 0.376 0.354 0.314 0.279 0.502 0.467 0.404 0.351 0.327 0.305 0.266 0.233 0.460 0.424 0.361 0.308 0.284 0.263 0.225 0.194 0.422 0.386 0.322 0.270 0.247 0.227 0.191 0.162 0.388 0.350 0.287 0.237 0.215 0.195 0.162 0.135 0.356 0.319 0.257 0.208 0.187 0.168 0.137 0.112 0.326 0.290 0.229 0.1820.163 0.145 0.116 0.093 0.299 0.263 0.205 0.160 0.141 0.125 0.099 0.078 0.275 0.239 0.183 0.140 0.123 0.108 0.084 0.065 Period 11 0.896 0.804 0.722 0.650 0.585 0.527 Period 12 0.887 0.788 0.701 0.625 0.557 0.497 Period 13 0.879 0.773 0.681 0.601 0.530 0.469 Period 14 0.870 0.758 0.661 0.577 0.505 0.442 Period 15 0.861 0.743 0.642 0.555 0.481 0.417 0.475 0.444 0.415 0.388 0.362 0.429 0.397 0.368 0.340 0.315 Period 16 0.853 0.728 0.623 0.534 0.458 0.394 Period 17 0.844 0.714 0.605 0.513 0.436 0.371 Period 18 0.836 0.700 0.587 0.494 0.416 0.350 Period 19 0.828 0.686 0.570 0.475 0.396 0.331 Period 20 0.820 0.673 0.554 0.456 0.377 0.312 0.3390.292 0.317 0.270 0.296 0.250 0.277 0.232 0.258 0.215 0.252 0.218 0.163 0.123 0.107 0.093 0.071 0.054 0.231 0.198 0.146 0.108 0.093 0.080 0.060 0.045 0.212 0.180 0.130 0.095 0.081 0.069 0.051 0.038 0.194 0.164 0.116 0.083 0.070 0.060 0.043 0.031 0.178 0.149 0.104 0.073 0.061 0.051 0.037 0.026 Period 21 0.811 0.660 0.538 0.439 0.359 0.294 0.2420.199 Period 22 0.803 0.647 0.522 0.422 0.342 0.278 0.226 0.184 Period 23 0.795 0.634 0.507 0.406 0.326 0.262 0.211 0.170 Period 24 0.788 0.622 0.492 0.390 0.310 0.247 0.197 0.158 Period 25 0.780 0.610 0.478 0.375 0.295 0.233 0.184 0.146 0.164 0.135 0.093 0.064 0.053 0.044 0.031 0.022 0.150 0.123 0.083 0.056 0.046 0.038 0.026 0.018 0.138 0.112 0.074 0.049 0.040 0.033 0.022 0.015 0.126 0.1020.066 0.043 0.035 0.028 0.019 0.013 0.116 0.092 0.059 0.038 0.030 0.024 0.016 0.010 0.135 Period 26 0.772 0.598 0.464 0.361 0.281 0.220 Period 27 10.764 0.586 0.450 0.347 0.268 0.207 Period 28 0.757 0.574 0.437 0.333 0.255 0.196 Period 29 0.749 0.563 0.424 0.321 0.243 0.185 Period 30 0.742 0.552 0.412 0.308 0.231 0.174 0.172 0.161 0.150 0.141 0.131 0.125 0.116 0.107 0.106 0.084 0.053 0.033 0.026 0.021 0.014 0.009 0.098 0.076 0.047 0.029 0.023 0.018 0.011 0.007 0.090 0.069 0.042 0.026 0.020 0.016 0.010 0.006 0.082 0.063 0.037 0.022 0.017 0.014 0.008 0.005 0.075 0.057 0.033 0.0200.015 0.012 0.007 0.004 0.099 Period 40 0.672 0.453 0.307 0.208 0.142 0.097 0.067 0.046 0.032 0.022 0.011 0.005 0.0040.003 0.001 0.001 Period 50 0.608 0.372 0.228 0.141 0.087 0.054 0.034 0.021 0.013 0.009 0.003 0.001 0.001 0.001 Periods Period 1 Period 2 Period 3 Period 4 Period 5 1% 2% 0.990 0.980 1.970 1.942 2.941 2.884 3.902 3.808 4.853 4.713 3% 0.971 1.913 2.829 3.717 4.580 Present Value of Ordinary Annuity of $1 4% 5% 6% 7% 8% 9% 10% 0.962 0.952 0.943 0.935 0.926 0.917 0.909 1.886 1.859 1.833 1.808 1.783 1.759 1.736 2.775 2.723 2.673 2.624 2.577 2.531 2.487 3.630 3.546 3.465 3.387 3.312 3.240 3.170 4.452 4.329 4.212 4.100 3.993 3.890 3.791 12% 14% 15% 0.893 0.877 0.870 1.690 1.647 1.626 2.402 2.322 2.283 3.037 2.914 2.855 3.605 3.433 3.352 16% 0.862 1.605 2.246 2.798 3.274 18% 20% 0.847 0.833 1.566 1.528 2.174 2.106 2.690 2.589 3.127 2.991 Period 6 Period 7 Period 8 Period 9 Period 10 5.795 5.601 6.728 6.472 7.652 7.325 8.566 8.162 9.471 8.983 5.417 6.230 7.020 7.786 8.530 5.242 5.076 4.917 4.767 4.623 4.4864.355 4.111 3.889 3.784 3.685 6.002 5.786 5.582 5.389 5.206 5.033 4.868 4.564 4.288 4.160 4.039 6.733 6.463 6.210 5.971 5.747 5.535 5.335 4.968 4.639 4.487 4.344 7.435 7.108 6.802 6.515 6.247 5.9955.759 5.328 4.946 4.772 4.607 8.111 7.722 7.360 7.024 6.710 6.418 6.145 5.650 5.216 5.019 4.833 3.498 3.326 3.812 3.605 4.078 3.837 4.303 4.031 4.494 4.192 Period 11 Period 12 Period 13 Period 14 Period 15 10.368 9.787 9.253 8.760 8.306 7.887 7.499 11.255 10.575 9.954 9.385 8.863 8.384 | 7.943 12.134 11.348 10.635 9.986 9.394 8.853 8.358 13.004 12.106 11.296 10.563 9.899 9.295 8.745 13.865 12.849 11.938 11.118 10.380 9.712 9.108 7.139 6.805 6.495 7.536 7.161 | 6.814 7.904 7.487 7.103 8.244 7.786 | 7.367 8.559 8.061 7.606 5.938 5.453 5.234 6.194 5.660 5.421 6.424 5.842 5.583 6.628 6.002 5.724 6.811 6.142 5.847 5.029 4.656 4.327 5.197 4.793 4.439 5.342 4.910 4.533 5.468 5.008 4.611 5.575 5.092 4.675 Period 16 14.718 13.578 12.561 11.652 10.838 10.106 9.447 8.851 8.313 7.824 Period 17 15.562 14.292 | 13.166 12.166 11.274 10.4771 9.763 9.122 8.544 8.022 Period 18 16.398 14.992 13.754 12.659 11.690 10.828 10.059 9.372 8.756 8.201 Period 19 17.226 15.678 14.324 13.134 12.085 11.158 10.336 9.604 8.950 8.365 Period 20 18.046 16.351 14.877 13.590 12.462 11.470 10.594 | 9.818 9.129 8.514 6.9746.265 5.954 7.1206.373 6.047 7.250 6.467 6.128 7.366 6.550 6.198 7.469 6.623 6.259 5.669 5.749 5.818 5.162 4.730 5.222 4.775 5.273 4.812 5.316 4.844 5.353 4.870 5.877 5.929 6.312 6.359 Period 21 18.857 17.011 15.415 14.029 12.821 11.764 10.836 10.0179.292 8.6497.562 6.687 Period 22 19.660 17.658 15.937 14.451 13.163 12.042 11.061 10.2019.442 8.772 7.645 6.743 Period 23 20.456 18.292 16.444 14.857 13.489 12.303 11.272 10.371 9.5808.883 7.718 6.792 Period 24 21.24318.914 16.936 15.247 13.799 12.550 11.469 10.529 9.707 8.985 7.784 6.835 Period 25 22.023 19.523 17.413 15.622 14.094 12.783 11.654 10.675 9.8239.077 7.8436.873 6.399 5.973 6.011 6.044 6.073 6.097 5.384 4.891 5.410 4.909 5.432 4.925 5.451 4.937 5.467 4.948 6.434 6.464 6.491 6.118 6.136 Period 26 22.795 20.12117.877 15.983 14.375 13.003 11.826 10.8109.929 9.161 7.896 6.906 Period 27 23.560 20.707 18.327 16.330 14.643 13.211 11.987 10.935 10.027 9.237 7.943 6.935 Period 28 24.316 21.281 18.764 16.663 14.898 13.406 12.137 11.051 10.116 9.307 7.984 6.961 Period 29 25.066 21.844 19.188 16.984 15.141 13.591 12.278 11.158 10.198 9.370 8.022 6.983 30 25.808 22.396 19.600 17.292 15.372 13.765 12.409 11.258 10.274 9.427 8.055 7.003 6.514 6.534 6.551 6.152 6.166 5.480 4.956 5.492 4.964 5.502 4.970 5.510 4.975 5.517 4.979 6.566 6.177 Period 40 32.835 27.355 23.115 19.793 17.159 15.046 13.332 11.925 10.757 9.779 8.244 7.105 6.642 6.233 5.548 4.997 Period 50 39.196 31.424 25.730 21.482 18.256 15.762 13.801 12.233 10.962 9.915 8.304 7.133 6.661 6.246 5.554 4.999 Future Value of $1 5% 6% Periods Period 1 Period 2 Period 3 Period 4 Period 5 1% 1.010 1.020 1.030 1.041 2% 3% 1.020 1.030 1.040 1.061 1.061 1.093 1.0821.126 1.104 1.159 4% 7% 1.040 1.050 1.060 1.070 1.082 1.103 1.1241.145 1.125 1.158 1.191 1.225 1.170 1.216 1.262 1.311 1.217 1.276 1.338 1.403 8% 9% 10% 1.080 1.090 1.100 1.166 1.1881.210 1.260 1.295 1.331 1.360 1.412 1.464 1.469 1.539 1.611 12% 14% 15% 1.120 1.140 1.150 1.254 1.300 1.323 1.405 1.482 1.521 1.574 1.689 1.749 1.762 1.925 2.011 1.051 1.062 1.126 1.194 1.072 1.149 1.230 1.083 1.172 1.267 1.094 1.195 1.305 1.105 1.219 1.344 1.265 1.340 1.419 1.501 1.587 1.677 1.772 1.974 2.1952.313 1.316 1.407 1.504 1.606 1.7141.828 1.949 2.211 2.502 2.660 1.369 1.4771.594 1.718 1.851 | 1.993 2.144 2.476 2.853 3.059 1.423 1.551 1.689 1.838 1.999 2.172 2.358 2.773 3.252 3.518 1.480 1.629 1.791 1.967 2.159 2.3672.594 3.106 3.707 4.046 1.116 1.127 1.138 1.243 1.268 1.294 1.384 1.426 1.469 1.513 1.558 1.539 1.710 1.898 2.105 2.332 2.580 2.853 3.479 4.226 | 4.652 1.601 1.796 2.012 2.252 2.518 2.813 3.138 3.896 4.818 5.350 1.665 1.886 2.133 2.410 2.720 3.066 3.452 4.363 5.492 6.153 1.732 1.980 2.261 2.579 2.937 3.342 3.798 4.887 6.261 / 7,076 1.801 2.079 2.3972.759 3.172 3.642 4.177 5.474 7.1388.137 1.319 1.149 1.161 1.346 1.173 Period 6 Period 7 Period 8 Period 9 Period 10 Period 11 Period 12 Period 13 Period 14 Period 15 Period 16 Period 17 Period 18 Period 19 Period 20 Period 21 Period 22 Period 23 Period 24 Period 25 Period 26 Period 27 Period 28 Period 29 Period 30 1.184 1.196 1.208 1.22 1.373 1.605 1.400 1.653 1.428 1.702 1.457 1.754 1.486 1.80 1.873 2.183 2.540 2.952 1.948 2.292 2.693 3.159 2.026 2.407 2.854 3.380 2.107 2.527 3.026 3.617 2.191 2.653 3.2073.870 3.426 3.970 4.595 3.700 4.328 5.054 3.996 4.717 5.560 4.316 5.142 6.116 4.661 5.604 6.727 6.130 8.1379.358 6.866 9.276 10.76 7.690 10.58 12.38 8.613 12.06 14.23 9.6 1.74 1.232 1.516 1.245 1.546 1.577 1.257 1.270 1.860 2.279 2.786 3.400 4.141 5.034 6.1097.400 1.916 2.370 2.925 3.604 4.430 5.437 6.659 8.140 1.974 2.465 3.072 3.820 4.741 5.871 | 7.258 8.954 2.033 2.563 3.225 4.049 5.072 6.341 7.911 9.850 2.094 2.666 3.386 4.292 5.427 6.848 8.623 10.83 10.80 15.67 18.82 12.10 17.86 21.64 13.55 20.36 24.89 15.18 23.21 28.63 17.00 26.46 32.92 1.608 1.641 1.282 1.295 1.308 1.321 1.335 1.348 1.673 2.157 1.707 2.221 1.741 2.288 2.772 3.556 4.549 5.8077.396 9.399 11.92 2.883 3.733 4.822 6.214 7.988 10.25 13.11 2.999 3.9205.112 6.649 8.627 11.17 14.42 3.119 4.116 5.418 7.114 9.317 12.17 15.86 3.243 4.3225.743 7.612 10.06 13.2717.45 19.04 30.1737.86 21.32 34.39 | 43.54 23.88 39.20 50.07 26.75 44.69 57.58 29.96 50.95 | 66.21 1.776 2.357 1.811 2.427 Period 40 1.489 2.208 3.262 4.801 7.040 10.29 14.97 21.72 31.41 45.26 93.05 188.9 267.9 Period 50 1.645 2.692 4.384 7.107 11.47 18.42 29.46 46.90 74.36 117.4 289.0 700.21,084 Periods Period 1 Period 2 Period 3 Period 4 Period 5 Future Value of Ordinary Annuity of $1 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 12% 14% 15% 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 2.010 2.020 2030 2.040 2.050 2.060 2.070 2.080 2.090 2.100 2.120 2.140 2.150 3.030 3.060 3.091 3.122 3.153 3.184 3.215 3.246 3.278 3.310 3.374 3.440 3.473 4.060 4.122 4.184 4.246 4.310 4.375 4.440 4.506 4.573 4.641 4.779 4.921 4.993 5.101 5.204 5.309 5.416 5.526 5.637 5.751 5.867 5.985 6.105 6.353 6.610 6.742 6.152 6.308 6.468 6.633 6.802 6.975 7.1537.336 7.523 7.716 8.115 8.536 8.754 7.214 7.434 7.662 7.898 8.142 8.394 8.654 8.923 9.200 9.487 10.09 10.73 11.07 8.286 8.583 8.8929.214 9.549 9.897 10.260 10.64 11.03 11.44 12.30 13.23 13.73 9.369 9.755 10.16 10.58 11.03 11.49 11.98 12.49 13.02 13.58 14.78 16.09 16.79 10.46 10.95 11.46 12.01 12.58 13.18 13.82 14.49 15.19 15.94 17.55 19.34 20.30 Period 6 Period 7 Period 8 Period 9 Period 10 Period 11 Period 12 Period 13 Period 14 Period 15 11.57 12.17 12.81 13.49 14.21 12.68 13.41 14.19 15.03 15.92 13.81 14.68 15.62 16.63 17.71 14.95 15.97 17.09 18.29 | 19.60 16.10 17.29 18.60 20.02 21.58 14.97 15.78 16.65 17.56 18.53 20.65 23.04 24.35 16.87 17.89 18.98 20.14 21.38 24.13 27.27 29.00 18.88 20.14 21.50 22.95 24.52 28.03 32.09 34.35 21.02 22.55 24.21 26.02 27.98 32.39 37.58 40.50 23.28 25.13 27.15 29.36 31.77 37.28 43.84 47.58 Period 16 Period 17 Period 18 Period 19 Period 20 17.26 18.64 20.16 21.82 23.66 18.43 20.01 21.76 23.70 25.84 19.61 21.41 23.41 25.65 28.13 20.81 22.84 25.12 27.67 30.54 22.02 24.30 26.87 29.78 33.07 25.67 27.89 30.32 33.00 35.95 42.75 50.98 55.72 28.21 30.84 33.75 36.97 40.54 48.88 59.12 65.08 30.91 34.00 37.45 41.30 45.60 55.7568.39 75.84 33.76 37.38 41.45 46.02 51.16 63.44 78.97 88.21 36.79 41.00 45.76 51.16 57.28 72.05 91.02 102.4 39.99 43.39 Period 21 Period 22 Period 23 Period 24 Period 25 23.24 25.78 28.68 31.97 35.72 24.47 27.30 30.54 34.25 38.51 25.72 28.85 32.45 36.62 41.43 26.97 30.42 34.43 39.08 44.50 28.24 32.03 36.46 41.65 47.73 47.00 44.87 50.42 56.76 64.00 81.70 104.8 118.8 49.01 55.46 62.87 71.40 92.50 120.4 137.6 53.44 60.89 69.53 79.54 104.6 138.3 159.3 58.18 66.76 76.79 | 88.50 118.2 158.7 | 184.2 63.25 73.11 84.70 98.35 | 133.3 181.9 212.8 50.82 54.86 59.16 Period 26 Period 27 Period 28 Period 29 Period 30 29.53 33.67 38.55 44.3151.11 30.82 35.34 40.71 47.08 54.67 32.13 37.05 42.93 49.97 58.40 33.45 38.79 45.22 52.97 62.32 34.78 40.57 47.58 56.08 66.44 63.71 68.53 73.64 79.06 68.68 79.95 93.32 109.2 150.3 208.3 245.7 74.48 87.35 102.7 121.1 169.4 238.5 283.6 80.70 95.34 113.0 134.2 190.7 272.9 327.1 87.35 104.0 124.1 148.6 214.6 312.1 377.2 94.46 113.3 136.3 164.5 241.3 356.8 434.7 Period 40 48.89 60.40 75.40 95.03 120.8 154.8 199.6 259.1 337.9 442.6 767.1 1,342 1,779 Period 50 64.46 84.58 112.8 152.7 209.3 290.3 406.5 573.8 815.1 | 1,164 2,400 4,995 7,218