Happy Bean 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 $1,500,000 with zero residual value at t end of ten years. Under Plan B, Happy Bean would open three larger shops at a cost of $8,640,000. 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 $925,000. Happy Bean uses straight-line depreciation and requires an annual return of 10%. (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.) (Click the icon to view the future value factor table.) Read the requirements 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.) Requirements 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 % 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 Happy Bean choose? Why? 3. Estimate Plan A's IRR. How does the IRR compare with the company's required rate of return? Plan B % Next compute the NPV (net present value) under each plan. Begin with Plan A, then compute Plan B. (Round your answe Net present value of Plan A Net present value of Plan B Print Done Match the term with the strengths and weaknesses listed for each of the three capital budgeting models. Capital budgeting models Strengths and weaknesses Is based on cash flows, can be used to assess profitability, and takes into account IL ......... Happy Bean 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 $1,500,000 with zero residual value at the end of ten years. Under Plan B, Happy Bean would open three larger shops at a cost of $8,640,000. 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 $925,000. Happy Bean uses straight-line depreciation and requires an annual return of 10%. (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.) (Click the icon to view the future value factor table.) Read the requirements. . 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. 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 Happy Bean choose? Why? Recommendation: Invest in It has the vnet 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 10%. Happy Bean 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 $1,500,000 with zero residual value at t end of ten years. Under Plan B, Happy Bean would open three larger shops at a cost of $8,640,000. 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 $925,000. Happy Bean uses straight-line depreciation and requires an annual return of 10%. (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.) (Click the icon to view the future value factor table.) Read the requirements 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.) Requirements 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 % 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 Happy Bean choose? Why? 3. Estimate Plan A's IRR. How does the IRR compare with the company's required rate of return? Plan B % Next compute the NPV (net present value) under each plan. Begin with Plan A, then compute Plan B. (Round your answe Net present value of Plan A Net present value of Plan B Print Done Match the term with the strengths and weaknesses listed for each of the three capital budgeting models. Capital budgeting models Strengths and weaknesses Is based on cash flows, can be used to assess profitability, and takes into account IL
