Happy BeanHappy Bean

Inc. operates a chain of

snacksnack

shops. The company is considering two possible expansion plans. Plan A would open eight smaller shops at a cost of

$8,940,000.

Expected annual net cash inflows are

$1,750,000

with zero residual value at the end of ten

years. Under Plan B,

Happy BeanHappy Bean

would open three larger shops at a cost of

$8,540,000.

This plan is expected to generate net cash inflows of

$1,100,000

per year for ten

years, the estimated life of the properties. Estimated residual value is

$1,100,000.

Happy BeanHappy Bean

uses straight-line depreciation and requires an annual return of 10%.

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 BeanHappy Bean choose? Why?
3.	Estimate Plan A's IRR. How does the IRR compare with the company's required rate of return?