Glascoe Inc. operates a chain of doughnut 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 $1,550,000 with zero residual value at the end of ten years. Under Plan B, Glascoe would open three larger shops at a cost of $8,740,000. This plan is expected to generate net cash inflows of $1,050,000 per year for ten years, the estimated life of the properties Estimated residual value is $1,100,000 Glascoe 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 present value factor table.) (Click the icon to view the future value annuity factor table.) Read the requirements (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 period for both plans. (Round your answers to one decimal place.) Plan A (in years) Plan B (in years) 35 34 Now compute the ARR (accounting rate of return) for both plans. (Round the percentages to the nearest tenth percent.) Plan A Plan B 34% 45 % Next compute the NPV (net 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 Net 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 Capital budgeting models Time Remaining: 00:49:43 Submit quiz Next compute the NPV (net present value) under each pian. begin win Pian A, inen compute Plan B. (Round your answers to t Net present value of Plan A Net 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 Capital budgeting models 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 Glascoe choose? Why? 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% ence Present Value of Annuity of $1 1% 0.990 1.970 2.941 3.902 4.853 2% 3% 4% 5% 6% 8% 10% 12% 0.980 0.971 0.962 0.952 0.943 0.926 0.909 0.893 14% 16% 18% 20% 0.877 0.862 0.847 0.833 1.942 1.913 1.886 1.859 1.833 1.783 1.736 1.690 1.647 1.605 1.566 1.528 2.884 2.829 2.775 2.723 2.673 2.577 2.487 2.402 2.322 2.246 2.174 2.106 3.808 3.717 3.630 3.546 3.465 3.312 3.170 3.037 2.914 2.798 2.690 2.589 Periods Period 1 Period 2 Period 3 Period 4 Period 5 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 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 Period 8 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 Period 9 8.566 8.162 7.786 7.435 7.108 6.802 6.247 5.759 5.328 4.946 4.607 4.303 4031 Period 10 9.471 8.983 8.530 8.111 7.722 7.360 6.710 6.145 5.650 5.216 4.833 4.494 4.192 Period 11 10.368 Period 12 11.255 9.787 9.253 8.760 8.306 7.887 7.139 6.495 5.938 5.453 5.029 4.656 4.327 10 575 9.954 9.385 8.863 8.384 7.536 6.814 6.194 5.660 5.197 4.793 4.439 11.348 10.635 9.986 9.394 8.853 7.904 7.103 6.424 5.842 5.342 4.910 4.533 12.106 11.296 10.563 9.899 9.295 8.244 7.367 6.628 6.002 5.468 5.008 4.611 12.849 11.938 11.118 10.380 9.712 8.559 7.606 6.811 6.142 5.575 5.092 4.675 Period 13 12.134 Period 14 13.004 Period 15 13.865 Period 20 18.046 16.351 14.877 13.590 12.462 11.470 9.818 8.514 7.469 6.623 Period 25 22.023 19.523 17.413 15.622 14.094 12.783 10.675 9.077 7.843 6.873 Period 30 25.808 22.396 19.600 17 292 15.372 13.765 11.258 9.427 8.055 7.003 Period 40 32 835 27.355 23.115 19.793 17 159 15.046 11.925 9.779 8.244 7.105 5.929 5.353 4.870 6.097 5.467 4.948 6.177 5.517 4.979 6.233 5.548 4.997 Print Done Reference I Reference Future Value of Annuity of $1 Periods 1% 2% 3% Period 1 1.000 1.000 1.000 Period 2 2.010 2.020 2.030 Period 3 3.030 3.060 3.091 3.122 3.153 3.184 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% 1.000 2.040 5% 1.000 2.050 6% 8% 1.000 1.000 2.060 2.080 3.246 10% 1.000 1.000 2.100 12% 14% 16% 18% 20% Periods 1.000 1.000 1.000 1.000 Period 1 2.120 2,140 2,160 2.180 2.200 Period 2 3.310 3.374 3.440 3.506 3.572 3.640 Period 3 4.506 4.641 4.779 4.921 5.066 5.215 5.368 Period 4 5.637 5.867 6.105 6.353 6.610 6.877 7.154 7:442 Period 5 Present Value of $1 5% 6% 0.952 0.907 0.890 0.957 1% 2% 3% 4% 8% 10% 12% 14% 16% 18% 20% 0.990 0.980 0.971 0.962 0.909 0.893 0.877 0.862 0.847 0.833 0.980 0.961 0.943 0.925 0.907 0890 0.857 0.826 0.797 0.769 0.743 0.718 0.694 0.971 0.942 0.915 0.889 0.864 0.840 0.794 0.751 0.712 0.675 0.641 0.609 0.579 0961 0.924 0.888 0.855 0.823 0.792 0.735 0.683 0.636 0.592 0.552 0.516 0.482 0.951 0.906 0.863 0.822 0.784 0.747 0.681 0.621 0.567 0.519 0.476 0.437 0.402 Period 6 6.152 6.308 6.468 6.633 6.802 6.975 7.336 7.716 8.115 8.536 8.977 9.442 9,930 Period 7 Period 8 Period 9 7.214 8.286 9.369 7.434 7.662 7.898 8.142 8.394 8.923 9.487 10.089 10.730 11.414 12:142 12.916 8.583 8.892 9.214 Period 10 9.897 10.637 11.436 12.300 9.549 10.159 10.583 11.027 11.491 12.488 13.579 14.776 9.755 10.462 10.950 11.464 12.006 12.578 13.181 14.487 15.937 17.549 13.233 14.240 15:327 16.499 16.085 19.337 Period 11 11.567 Period 12 12.169 12.808 13.486 14.207 14.972 16.645 18.531 20.655 12 683 13.412 14.192 15.026 15.917 16.870 18.977 21.384 24:133 23.045 27.271 Period 13 Period 14 Period 15 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 16.097 17.293 18.599 20.024 21.579 23.276 27.152 31.772 37.280 32.089 36.786 42.219 17.519 19:086 20.799 21.321 23.521 25.959 25.733 28.755 32.150 39.581 30.850 34.931 48.497 0837 078 0731 32.393 37.581 43.672 50.818 59 196 43.842 51.660 60 965 72.035 146.628 Period 20 22.019 24.297 26.870 29.778 33.066 36.786 45.762 57.275 72.052 249.214 342.603 Period 25 28.243 32.030 36.459 41.646 47.727 54.865 73.106 98.347 133.334 181.871 530.312 790.948 1.181.882) Period 30 34.785 40.568 47.575 56.085 66.439 79.058 113.283 164.494 241.333 356.787 Period 40 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 91.025 115.380 186 688 471.981 Period 6 160.942 0.888 0.837 0.790 0.746 0.705 0.630 0.564 0.507 0.456 0.410 0.370 0.335 Period 7 0.933 0.871 0.813 0.760 0.711 0.665 0.583 0.513 0.452 0.400 0.354 0.314 0.279 0.923 Period 8 731 0.677 0.627 0.540 0.467 0.351 0.305 0.404 0.266 0.233 Period 9. 0.914 0.837 0.766 0.703 0.361 0.645 0.592 0.500 0.424 0.263 0.225 0.194 0.308 Period 10 0.905 0.820 0.744 0.676 0.614 0.558 0.463 0.386 0.322 0.270 0.227 0.191 0.162 Period 11 0.896 0.804 0.722 0.650 0.585 0.527 0.429 0.350 0.287 0.237 0.195 0.162 0.135 0.257 Period 12 0.887 0.788 0.701 0.625 0.557 0.497 0.397 0.319 0.168 0.137 0.112 0.208 Period 13 0.879 0.773 0.681 0.601 0.368 0.530 0.469 0.182 0.290 0.229 0.145 0.116 0.093 0.577 0.505 0.442 Period 14 0.870 0.758 0.661 0.340 0.263 0.205 0.160 0.125 0.099 0.078 Period 15 0.861 0.743 0.642 0.555 0.481 0.417 0.315 0.239 0.183 0.140 0.108 0.084 0.065 Period 20 0.820 0.673 0.554 0.456 0.377 0.312 0215 0.149 0.104 0.073 0.051 0.037 0.026 Period 25 0,780 0.610 0.478 0.375 0.295 0.233 0.146 0.092 0.059 0.038 0.024 0.016 0.010 Period 30 0.742 0.552 0.412 0.308 0.231 0.174 0.099 0.057 0.033 0.020 0.012 0.007 0.004 Period 40 0.672 0.453 0,307 0.208 0.142 0.097 0.046 0.022 0.011 0.005 0.003 0.001 0.001 Print Done Print Done Future Value of $1 Periods 1% 2% 3% 4% 5% Period 1 1.010 1.020 1.030 1.040 1.050 Period 2 1.020 1.040 1.061 1.082 Period 3 1.030 1.061 1.093 1.125 1.158 6% 1.060 1.103 1.124 1.166 1.191 8% 10% 12% 14% 16% 18% 20% 1.080 1100 1.120 1.140 1.160 1.180 1.200 1.210 1.254 1.300 1.346 1.392 1.440 Period 4 1.041 1.082 1.126 1.170 1.216 1.262 Period 5 1.051 1.104 1.159 1.217 1.276 1.338 1.260 1.360 1.469 1.611 1.331 1.405 1.482 1.561 1.643 1.728 1.464 1.574 1.689 1.811 1.939 2.074 1.7621 1.925 2.100 2.288 2.488 Period 6 1.062 1.126 1.194 1.265 Period 7 1.072 1.149 1.230 1.316 1.340 1.419 1.407 1.504 Period 8 1.083 1.172 1.267 1.369 1.477 1.594 1.587 1.772 1.714 1.851 2.144 1.974 2.195 2.436 2.700 2.986 1.949 2211 2.502 2.826 3 185 3.583 2.476 2.853 3.278 3.759 4.300 Period 9 1.094 1.195 1.305 1.423 Period 10 1.105 1.219 1.344 1.480 1.551 1.689 1.999 2.358 1.629 2.773 3.252 3.803 4.435 5.160 1.791 2.159 2.594 3.106 3.707 4.411 5.234 6.192 Period 11 1.116 1.243 1.384 1.539 1.710 1.898 2.332 2.853 3.479 4.226 5.117 6.176 7.430 Period 12 1.127 1.268 1.426 1.601 1.796 2.012 2518 3.138 3.896 4 818 5.936 7.288 8.916 Period 13 1.138 1.294 1.469 1.665 Period 14 1.149 1.319 1.513 1.732 1.886 1.980 2.133 2.720 3.452 4.363 5.492 6.886 8.599 10.699 2 261 2.937 3.797 4.887 6.261 7.988 10.147 12.839 Period 15 1.161 1.346 1.558 1.801 2.079 2.397 3.172 4.177 5.474 7.138 9.266 11.974 15 407 Period 20 1.220 1.486 Period 25 1.282 1.641 2.094 1.806 2.191 2.666 2.653 Period 30 1.348 1.811 Period 40 1.489 2.208 3.262 2.427 3.243 4.801 3.386 4.322 5.743 3.207 4.661 4.292 6.727 9.646 13 743 19 461 27.393 38.338 6.848 10 835 17.000 26.462 40 874 62 669 95.396 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 Print Done