A More Info The company is considering two possible expansion plans. Plan A would open eight smaller shops at a cost of $8,450,000. Expected annual net cash inflows are $1,600,000 for 10 years, with zero residual value at the end of 10 years. Under Plan B, Lukes Company would open three larger shops at a cost of $8,240,000. 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 $1,200,000. Lukes Company uses straight-line depreciation and requires an annual return of 9%. Present Value of $1 6% 0.943 0.890 0.840 0.792 0.747 0.705 0.665 0.627 0.592 0.558 0.527 0.497 0.469 0.442 0.417 0.905 1% 2% 3% 4% 0.990 0.980 | 0.971 | 0.962 0.980 0.961 0.943 0.925 0.971 0.942 0.915 0.889 0.961 0.924 0.888 0.855 0.951 0.906 | 0.863 0.822 0.942 0.888 | 0.837 0.790 0.933 0.871 0.813 0.760 0.923 0.853 0.789 0.731 0.914 0.837 | 0.766 0.703 0.820 | 0.744 0.676 0.896 0.804 0.722 0.650 0.887 0.788 0.701 0.625 0.879 0.773 0.681 0.601 0.870 0.758 0.661 0.577 0.861 0.743 0.642 0.555 0.853 0.728 0.623 0.534 0.844 0.714 0.605 0.513 0.836 0.700 587 0.494 0.828 0.686 0.570 | 0.475 0.673 0.554 0.456 0.811 0.660 0.538 0.439 0.803 0.647 0.522 0.422 0.795 0.634 0.507 0.406 0.788 0.622 0.492 0.390 0.780 0.610 0.478 0.375 0.772 0.464 0.361 0.764 0.586 0.347 0.757 0.574 0.437 0.333 0.7490.563 0.424 0.321 0.742 0.552 0.412 0.308 0.672 0.453 0.307 0.208 5% 0.952 0.907 0.864 0.823 0.784 0.746 0.711 0.677 0.645 0.614 0.585 0.557 0.530 0.505 0.481 0.458 0.436 0.416 0.396 0.377 0.359 0.342 0.326 0.310 0.295 0.281 0.268 0.255 0.243 0.231 0.142 7% 8% 0.935 | 0.926 0.873 0.857 0.816 0.794 0.763 0.735 0.713 0.681 0.666 0.630 0.623 0.583 0.582 0.540 0.544 0.500 0.508 0.463 0.475 0.429 0.444 0.397 0.415 0.368 0.388 0.340 0.362 0.315 0.339 0.292 0.317 0.270 0.296 0.250 0.277 0.232 0.258 0.215 0.242 0.199 0.226 0.184 0.211 0.170 0.197 0.158 0.184 0.146 0.172 0.135 0.161 0.125 0.116 0.107 0.131 0.099 0.067 9% 0.917 0.842 0.772 0.708 0.650 0.596 0.547 0.502 0.460 0.422 0.388 0.356 0.326 0.299 0.275 0.252 0.231 0.212 0.194 0.178 0.164 0.150 0.138 0.126 0.394 10% 12% 14% 0.909 0.893 0.877 0.826 0.797 0.769 0.751 0.712 0.675 0.683 0.636 | 0.592 0.621 0.567 0.519 0.564 0.507 0.456 0.513 0.452 0.400 0.467 | 0.404 0.351 0.424 | 0.361 0.308 0.386 0.322 0.270 0.350 0.287 0.237 0.319 0.257 0.208 0.290 0.229 0.182 0.263 0.205 0.160 0.239 0.183 0.140 0.218 0.163 0.123 | 0.1980.146 0.108 0.180 0.130 0.095 0.164 0.116 0.083 0.149 0.104 0.073 0.135 0.093 0.064 0.123 0.083 0.056 0.112 0.074 0.049 0.102 0.066 0.043 0.092 0.059 0.038 0.084 0.053 0.033 0.076 0.047 0.029 0.069 0.042 0.026 | 0.037 | 0.022 0.057 0.033 0.020 0.022 0.011 0.005 15% 16% 18% 20% 0.870 0.862 0.847 0.833 0.756 0.743 0.7180.694 0.658 0.641 0.609 0.579 0.572 0.552 0.516 0.482 0.497 0.476 0.437 0.402 0.432 0.410 0.370 0.335 0.376 0.354 | 0.314 0.279 0.327 0.305 | 0.266 0.233 0.284 0.263 | 0.225 0.194 0.247 0.227 | 0.191 0.162 0.215 0.195 | 0.162 0.135 0.187 0.168 0.137 0.112 0.163 0.145 | 0.116 0.093 0.141 0.125 0.099 0.078 0.123 0.108 | 0.084 0.065 0.107 0.093 0.071 0.054 0.093 0.080 0.060 0.045 0.069 0.051 0.038 0.070 0.060 | 0.043 0.031 0.061 0.051 0.037 0.026 0.053 0.044 0.031 0.022 0.046 0.038 | 0.026 0.018 0.040 0.033 0.022 0.015 0.035 0.028 0.019 0.013 0.030 0.024 0.016 0.010 0.026 | 0.021 0.014 0.009 0.023 0.018 0.011 0.007 0.0200.016 0.010 0.006 0.017 | 0.014 0.008 0.005 0.015 0.012 0.007 0.004 0.0040.003 0.001 0.001 0.081 0.820 0.371 0.350 0.331 0.312 0.294 0.278 0.262 0.247 0.233 0.220 0.207 0.196 0.185 0.174 0.097 0.116 0.598 0.150 0.141 0.106 0.098 0.090 0.082 0.075 0.032 0.063 0.046 L355 | | 3326 5.532 7.552 8.983 | 6424 Present Value of Ordinary Annuity of $1 | Fariods | 1% | 2% | 3% | 4% | 5% | 6% | 7% | | 3% | | 9% | 10% | 12% | 14% | 15% | 16% | 18% | 20% | 0990 | 0980 | 0971 | 1962 | | 0952 | 0943 | 0935 | 0926 | 0917 | 0909 | 0883 | 0377 | 0370 1062 1047 10888 1.970 | 1.942 | 1913 | 1.886 | 1.859 | 1.833 | 1.803 | 1.783 | 1.759 1736 | 1.590 | 1.647 | 1.626 | 1.605 | 1.566 | 1.523 2941 2884 | 2829 | 275 2723 2673 | 2624 | 2577 2531 2487 2402 | 2322 | 2283 2246 | 2174 | 2106 3.902 3.808 | 3717 3.630 3.546 3465 3387 | 3312 3.240 3.170 3.037 2914 2855 2798 | | 2690 || 2589 4.353 4.713 14.580 4452 4.329 4212 4.100 13.993 3890 3.791 3.605 3433 3.352 3274 13127 291 5.795 5.601 | 5.417 | 5.242 5.076 4917 4.767 | 4.623 4.486 4.111 3889 3.784 3.585 3498 5/22 647215230 6002 5.786 5.389 5206 5.033 4.268 4.564 4.288 4.160 4.39 3.312 3.605 7325 | 7.020 | 6733 6.463 6210 5971 15.747 5.535 5.335 14.968 4.639 14.487 4.344 4.073 3837 3.566 3.162 | 7.786 | 7435 7.108 6.802 6.515 | 6247 | 5995 5.758 15.328 4.946 4.772 4.607 | 4.303 4.031 9471 | 8530 | 8.11 7.722 7.360 7.024 | 6.710 | 5413 6.145 5.650 5.216 5.019 4.333 4.494 4.192 10.368 9.787 | | 9253 | 3760 3.306 7.387 7.499 | 7.139 | 6805 6.495 | 5938 5.453 5234 5.029 4.656 4.327 | 10.575 | 9954 | 3385 8863 3384 7943 | 7.536 | 17.161 6.314 | 6121 5.560 5421 5.197 4793 4.439 | 11.3.8 | 10.535 | 9986 | 9.394 | 18853 | | 7.904 | 7487 7.103 5.842 5.583 5.342 4910 4.533 | 12.106 | 11.295 | 10.56 | 9899 | 9295 || 8.745 | 8244 7.786 7.367 | | 6628 5002 5.724 5.468 | 5.008 4.611 | 12.849 | 11.938 | 11.18 | 10.380 | 9712 | 9.108 | 8.559 20061 7.506 | 6.811 6.142 5.347 5.5751 5.092 4.575 14.718 | 13.578 | 12.561 | 11.852 | 10 888| 10 106 | 9447 | 8851 | 8.313 | 7.324 | 6974 | 6265 15.954 5.669 | 5.162 4.730 15.562 | 14.292 |3166 | 12.166 | 11.272 | 10.477 | 9763 19.122 | 8.544 | 8022 | 7.120 6.373 6.047 5.749 | 5222 4.75 13.754 | 12.69 | 11.90 | 10 828 | 10.058 19372 || 3.756 8201 7250 6.467 6.128 5818 | 5273 4.812 | 15.678 | 14.324 || 13.134 | 12.085 | 11.158 | 10.336 19604 | 18.365 | 7.366 6.550 6.198 5.877 || 5.316 14.844 18.046 | 16.351 | 14.877 | 13.590 | 12.462 | 11.470 | 10.594 19813 9.129 8.514 7469 | 6623 6.259 5.929 5.353 14.870 17.01 | 15415 14.025 12.821 | 11.76 | 10.836 10.017 3292 8.549 7562 6.687 6312 5.973 4.891 17.558 15.937 14.451 13.163 12.042 | | 11.061 10 201 9442 8.772 7.645 6.743 6.359 6.011 5.410 4.909 18.292 | 16.444 | 14.857 3.483 11.272 10.371 9.580 8883 7.718 6.792 6399 6.044 5432 4925 18.914| 16.936 15.247 13.799 12550 | | 11468 10.529 9.707 18.985 7.784 6.835 6.434 6.073 5.451 4937 22.023 | 19.523 | | 1743 14.094 12.783 | | 11.654 10.675 9823 19.07 | 7.843 6.873 6.464 6.097 5.467 4.948 1.877 15.983 14.375 | 13.00 | 11.826 10310 9929 3161 7.896 6.906 | 6491 6.118 5.480 4.956 23.560 18.327 16.330 14.543 13.211 | 11.987 10.935 10.027 | 19237 7.943 6935 6514 6.136 5.492 4.964 18.764 16.663 14.898 13.406 | 12.137 11.051 10.116 | 9.307 | 7.984 6961 16534 6152 4.970 19.188 16.984 15.141 | 13.591 | 12.278 11.158 | 10.198 | 9.370 8022 6.983 | 5.551 | 6166 | 5.510 4.975 25.808 22396 19.600 17 292 15.372 | 13.765 | 12.405 1258 | 10.274 | 9427 8.055 7.003 | 5566 | 617 5.517 4979 32.835 | 27.355 | 23.15 | 9.793 | 17.159 | 15.046 | 13332 | 11.325 | 10.757 | 9.79 | 8.244 | 7.105 6.642 | 6.233 4.997 7 16.857 5.3L 15.622 2795 1707 316 | 5.502 Future Value of $1 Fe 2.172 2759 e l 1% | 2% | 3% | 4% | 5% | 6% 7% 3% | 99 | 10% | 12% | 14% | 15% 1.010 | 1.020 ] 1.030 | 1.040 | 1.050 | 1.060 | 1.070 | 1.080 | 1.090 | 1.100 | 1.120 | 1.140 | 1.150 1020 | 1.040 | 1.061 11.082 | 1.103 | 1.124 | 1.145 1.166 | 1.188 | 1.210 | 1.254 | 1300 | 1323 1030 | 1061 | 1.093 1.125 | 1.153 | 1.191 1225 1260 | 1.295 | 1.331 | 1.405 1.482 | 1.521 1041 | 1082 | 1.126 1.170 | 1.216 | 1.262 1.31 1.360 | 1.412 | 1.464 1.574 1.689 | 1.749 1051 | 1.104 11.18 1.217 | 1.276 | 1.333 1403 1.469 | 1.539 | 1.511 1762 1.925 | 2.011 1.062 | 1.126 | 1.194 1265 | | 1.340 1419 1.501 1.587 | 1.677 | 1.772 1974 2195 2313 1.072 | 1.149 1.230 1.316 | 1.407 1.504 1.606 1.714 | 1.823 1949 2.211 2.502 2560 1.083 | 1.172 1267 1.369 | | 1.477 1.594 1.713 1.851 | 1.993 2.144 2476 2853 3059 1.094 | 1.195 1305 1.423 | 1.551 | 1.688 1.838 1999 | 2358 2773 3252 3513 1.105 | 1.219 1344 1.480 1.629 1791 1.967 2159 2367 2.594 3.106 3707 4.046 1.116 | 1.243 1384 1.539 1.710 1.898 2105 2332 2580 3479 4.226 4652 1.127 1.268 1426 1.601 1.796 2012 2252 2518 2813 3.896 4.818 5.350 1.138 1294 1469 1.665 | | 1.886 2133 2410 2720 3066 4.363 5.492 6.153 1.149 1319 1513 132 | 1.980 2261 2579 2937 3342 4.887 6.261 7.076 1.161 1.346 1.558 1.01 2079 2397 3.172 3542 4.1V 5474 | 7.138 8.137 1.13 1.373 1.605 1.373 2183 2540 2952 3426 3970 4.595 6.130 | 3.137 9358 1.184 1.400 1.653 1.948 3.159 3700 4.328 5.054 6.866 9276 10.76 1.196 1.423 1.702 2026 2854 3.380 3996 | 4.717 5.560 7.690 | 10.58 12.38 1.208 1457 | 1754 2107 2527 | 3026 3.617 4.316 15.142 | 6.116 8.613 | 12.06 14.23 1.220 | 1.486 | 1.806 2191 2653 | 3207 3870 4.661 || | 5.604 | 6.727 9.546 13.74 16.37 1232 | 1516 | 1.860 2279 2736 3400 4.141 5.034 | 6109 | 7400 10.80 15.57 13.82 1245 | 1.546 1916 2.370 2925 | 3.604 4.430 5437 | 6659 | 8.140 12.10 17.86 21.54 1.257 | 1.577 1.974 2465 3820 4.741 5.371 | 7258 | 2954 13.55 20.36 24.88 1.270 | 1.608 2033 2563 3225 14.049 5.072 6341 | 7.311 | 3850 15.18 23.21 28.63 1282 | 1.641 20094 2.666 | 3386 4.292 5427 6848 18623 | 10.88 17.00 32.92 1295 | 1673 2157 2772 | 3.556 14.549 5807 7.396 | | 9.399 19.04 1.308 | 1.707 2221 2883 | 3733 4.822 6214 7.988 | 10 25 | | 13.11 21.32 1.321 | 1.741 2288 2999 | 3920 15.112 6.549 8.627 | 11.17 14.42 23.88 1.335 | 1.76 || 2357 3.119 | 4.116 | 5413 7.114 3317 | 12.17 | 15.86 | 26.75 1.343 | 1.811 | 2427 3243 | 4.322 5.743 7.612 10.06 | 13.27 | 17.45 29.96 50.95 1489 | 2208 | 3262 | 4.801 | 7.040 | 10.29 | 14.97 | 21.72 | 31.41 | 45.26 | 98.05 | 1889 2202 2.695 2407 3.072 | 11.92 | 2673 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.) Plan A Plan B Payback years years Calculate the ARR (accounting rate of return) for both plans. (Round your answers to the nearest tenth percent, X.X%.) ] = 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 Inflow Annuity PV Factor (i=9%, n=10) PV Factor (i=9%, n=10) Present Value Years 1 - 10 10 Present value of annuity Present value of residual value Total PV of cash inflows 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 amounts to three decimal places, X.XXX. Use parentheses or a minus sign for a negative net present value.) Net Cash Inflow Annuity PV Factor (i=9%, n=10) PV Factor (i=9%, n=10) Present Value Plan B: Years 1 - 10 10 Present value of annuity Present value of residual value Total PV of cash inflows 0 Initial Investment Net present value of Plan B Calculate the profitability index of these two plans. (Round to two decimal places X.XX.) = Profitability index Plan A 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 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 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. 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 Lukes Company choose? Why? Lukes Company should invest in profitability index. because it has a payback period, a ARR, a net present value, and a 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 This rate the company's hurdle rate of 9%