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7. Hill Company operates a chain of sandwich shops. (Click the icon to view additional infomation.) Read the reguirements (Click the icon to view Present Value of $1 table.) (Click the icon to view Present Value of Ordinary Annuity of S1 table.) (Click the icon to view Future Value of $1 table.) (Click the icon to view Future Value of Ordinary Annuity of $1 table.) 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, XX.) Amount invested 8,700,000 8,340,000 Expected annual net cash inflow Plan A $ Plan B $ Calculate the ARR(accounting rate of retum) for both plans. (Round your answers to the nearest tenth percent, .%.) 1.550,000 ears 990.000 ears Average annual operating income 680,000 276,000 Average amount invested 4,350,000 4,770,00O ARR Plan A $ Plan B $ 15.6 % Caclulate the NPV (net present value) of each plan. Begin by calculating the NPV of Plan A. Complete all answer boxes. Enter a " 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 PV Factor Years 1-10 10 Annuity PV Factor (i-10%, n.10) Present Value $ 9.524,750 (i-10%, n-10) 5 1,550,000 6.145 Present value of annuity Prescnt valuc of residual value Total PV of cash inflows Initial Investment Net present value of Plan A 9,524,750 6,700,000 $ 824,750 0 Calculate the NPV of Plan B. (Complete all answer boxes. Enter a "" 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 B Net Cash Inflow S 990,000 Annuity PV Factor PV Factor Present 10%, -10) (je10%, -10) Value $ 6,083,550 463,200 6.546,750 110 Present value of annuity 6,145 10 Present value of residual value 1.200,000 0.386 Total PV of cash inflows 340,000 0 tial Investment $ (1,793.250) Net present value of Plan B Calculate the profitability index of these two plans. (Rourd to two decimal places X.xx.) Present value of net cash inflows Initial investment 8.700,000 8,340,000 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 Mcthod Net present value 9,524,750 1.09 6,546,750 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 t has none of the weaknesses of the other models. Is easy lo undersland, is based on cash flows, and highlighls risks. Payback method 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 ARR index Requirement 3. Which expansion plan should Hill Company choose? Why? Hill Company shoukd invest in Plan A because it has a shorter payback period, a higher ARR, a higher net present value, and a higher 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 12%-14% This rate exceeds the company's hurdle rate of 10%. The company is considering two possible expansion plans. Plan A would open eight smaller shops at a cost of $8,700,000. Expected annual net cash inflows are $1,550,000 for 10 years, with zero residual value at the end of 10 years. Under Plan B, Hill Company would open three larger shops at a cost of $8,340,000. This plan is expected to generate net cash inflows of $990,000 per year for 10 years, the estimated useful life of the properties. Estimated residual value for Plan B is $1,200,000. Hill Company uses straight-line depreciation and requires an annual return of 10%. 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 Hill Company choose? Why? 4. Estimate Plan A's IRR. How does the IRR compare with the company's required rate of return? 3: Reference Present Value of S1 Periods | 1% | 2% 6% | 7% | 8% | 9% | 10% | 12% | 14% | 15% | 16% | 18% | 20% 0.990 0.980 0.970.962 0.9520.943 0.93 0.926 0.917 0.909 0.893 0.877 0.870 0.20.8470.833 20.980 0.9610.943 0.925 0.907 0890 0.873 0.857 0.842 0.826 0.797 0.769 0.756 0.743 0718 0.694 3 0.971 09420910.889 0.864 0840 0816 0.794 0.772 0.751 07120.675 0.658 0641 0.6090.579 4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0683 06360.592 0.572 0.5520516 0.482 5 | 0.951 | 0.006 | 0.863 | 0.822 | 0.784 | 0.747 | 0.713 | 0.681 | D.650 | 0.521 | 0.567 | 0.519 | D.497 | 0.476 | 0.437 | 0.402 3% | 4% | 5% 6 0.942 0888 0837 0.790 0.746 0.705 0666 0.6300.590564 0507 0456 0432 0410 0370 0.335 7 0.933 0871 0.813 0.7600.711 0665 0.623 0.583 0.547 0.513 04520.4000.376 0.354 0.314 0.279 8 0.923 0.853 0.789 0.730.670.6270.582 0.540 0.502 0.467 0.4040.3510.327 0.305 0.266 0.233 9 0.914 0.837 0.766 0.703 0645 0.592 0.544 0.500 0.460 0.424 0.361 0.308 0284 0.2630.225 0.194 10 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0422 0.386 0.3220.2700.2470.2270.19 0.162 110.896 0.804 0.722 0.650 0.585 0.5270.475 0.429 0.388 0.350 0.2870.237 0.215 0.195 0.162 0.135 12 0.887 0.7880.701 0.625 0.557 0497 0440.397 0.356 0319 0.2570208 0.18 0.168 0.137 0,112 13 0.879 0.773 0.681 0.6010.530 04690.415 0.368 0.326 0.290 0.229 0.1820.163 0.145 0.116 0.093 14 0870 0.7580.661 0.577 0.505 0442 0.3880.340 0.299 0.263 0.205 0.160 0.141 0.125 0.099 0.078 15 08610.743 0.642 0.555 0481 0417 0.3620.315 0.275 0.239 0.183 0.140 0.123 0.1080084 0.065 16 0.853 0.728 0.6230.534 0.458 0.394 0.339 0.292 0.252 0218 0.163 0.123 0.107003 0.071 0.054 17 0.8440.714 0.605 0.513 0.436 0.371 0.3170.270 0.2310.198 0.146 0.108 0.093 0.080 0060 0.045 18 0.836 0.700 0.587 0.494 0416 0.350 0296 0.250 0.212 0.180 0.130 0,0950.0810.0690050.038 19 | 0.828 | 0.686 | 0.570 | 0.475 | 0.396 | 0.331 | 0.277 | 0.232 | 0.194 | 0.164 | 0.116 | 0.083 0.070 | 0.060 | 0.043 | 0.031 20 0.820 0.673 0.554 0.456 0.377 0.312 0.258 0.215 0.178 0.1490.104 0.0730.061 0.0510.037 0.026 21 0.811 0.660 0.538 0.439 0.359 0290.242 0.199 0.164 0.135 0.083 0.0640.053 0.0440031 0.022 22 0.803 0.647 0.522 0.4220.342 0.2780.226 0.184 0.150 0.123 0.083 0.0560.046 0.0380.026 0.018 230.795 0.634 0.507 0.406 0.326 0262 0211 0.170 0.138 0.112 0074 0.049 0040 0.033 0022 0.015 24 0.788 0622 0.492 0.390 0.310 0.247 0.197 0.158 0.126 0.102 0.066 0.0430.0350.0280.0190.013 25 0.780 0.610 0.478 0.3750.2950.233 0.184 0.146 0.116 0.092 0.059 0.0380.030 0.024 0.016 0.010 26 | 0.772 | 0.598 | 0.464 | 0.361 0.281 | 0.220 | 0.172 | 0.135 0.106 | 0084 | 0053 | 0,033 | 0.026 | 0.021 | 0.014 | 0.009 27 0.7640.5860.450 0.347 0.2680.207 0.161 0.125 0098 0.076 0.047 0.029 0.023 0.018 0.011 0.007 28 0.757 0.574 0.4370.3330.255 0.196 0.150 0.116 0.090 0.069 0.0420.026 0.0200.016 0.010 0.006 29 0.749 0.53 0.4240321 0.243 0.180.141 0.107 0.082 0.063 0037 0.022 0.010.0140.008 0.005 30 0.742 0.5520.412 0.308 0.2310.1740.13109 0.075 0.05700330.00.015 0.012 00070.004 40 0.6720453 0.307 0.208 0.142 0.0970.07 0.046 0.032 0.022 001 0.005 0004 0.003 0001 0.001 50 0.608 0.372 0.228 0.141 0.OBT 0.054 0.034 0.021 0.013 0.00 0.003 0.001 0.001 0.001 Present Value of Ordinary Annuity of $1 Periods | 1% | 2% | 3% | 4% | 5% | 6% | 7% | 8% | 9% | 10% | 12% | 14% | 15% | 16% | 18% | 20% | | 0980 | D.980 | 0.971 | 0.962 | 0.962 | 0.943 0.935 | 0.926 | 0917 | Dg09 | 0.893 | 0.877 | 0.870 | 0.862 | 0.847 | 0.833 2 1970 942113 18 185 18331808 7831759 1736 147 11605156 1.528 3 2941 2.884 2829 2.775 2.723 2.673 2.624 2577 2531 2 487 2402 2.322 2.283 2.248 2.1742.106 43.902 3.808 3.7173.6303.5463.465 3.337 3.312 32403.170 3.0372.9142.855 2.7982.69025%9 54853 4.7134.5804452 4.3294212 4.100 3.9933890 3.7913605 3.433 3.3523.2743.127 2991 6 5795 5501 541752425.0764917 4.767 4.623 4486 4355 4.111 3 3.784 365 3498 3.326 76.728 6472 6230 6.0025.788555.389 5.2065033 4868 45644.288 4.160 403 3.812 3.605 8 7652 7325 70206.733 6.4636.210 5.9715.7475535 5335 49684.6394.487 4.34.078 3.837 9 8.566 .162 7786 74357,108 6.8026.515 6.247 5995 5.759 5.3284.944.7724.607 4.303 4.031 10 | 9471 | B.983 | 8.530 8.111 | 7.722 | 7.360 | 7.024 | 6.710 | 418 | 6145 | 5 650 | 5.216 | 5.019 | 4.633 | 4.494 | 4.192 11 10.368 97879253 8.768.3067.8877.499 7.139 6805 645 5938 5453 5.2345.029656 4.327 12 11255 10.575 9954 9.3858.8638.384 7.9437.536 161 6 814 6.195.66054215.974.793 4.439 13 | 12.134 | 11.348 | 10.635 | 9.986 | 9.394 | 8.853 | 8.358 | 7.904 | 487 | 7103 | 6.424 | 5.842 | 5.583 | 5.342 | 4.910 | 4.533 14 13.004 12.108 11.29310.5839.999.2958.745 8.2447.78673676.8286.0025.7245.465.004.611 15 13.865 12.849 11.38 11.118 10.380 9.7129.1088.559LOK176066.8116.1425.8475.5755.092 4.675 16 14.718 13.578 12.561 11.652 10.838 10.1069.44788518313 7824 6974 6.265 5.954 5.669 5.162 4.730 17 15.562 4292 13.16 12,1 11.274 10.477 9.763 9.122 544 022 7.1206.373 6.0475.749 5.222 4.775 18 6.39 14.992 3.754 12.659 11.690 10.828 10.059 9.372 9.756 82017250 6467 6.12858195.273 4.812 19 17 226 15.678 14.324 13.134 12.085 .158 10.336 9.604 8.9508365 7.366 6.550 6.195877 5.316 4.844 20 | 18.046| 16.351 | 14.877|13.590| 12.462| 11.470| 594| 9.818 | 9129 | B 514 7469 | 6.823 | 6.259 | 5.929 | 5.353 | 4870 21 8857 17011 15.415 14.029 12.821 11.764 10.836 10017 9292 8649 7562 6.887 6.312 5.973 5384 4.891 22 19660 7.65 15.937 14.451 13.163 12.042 11.061 0201 942 8.772 76456.743 6359 6.011 5.410 4.909 23 20456 18.292 16.444 14.85713.48912.303 11.272 10371 9580 8883 7.7186.792 6.39960445432 4925 24 | 21.243 | 18.914| 16.935 | 15.247 | 13.799 | 12.550| 11.469|10529| 9707 | B985 7,784 | 6.835 | 6.434 | 6.073 | 5.451 | 4.937 25 22.023 19.523 17.413 15.622 14.09412.7831154065 9823907773436.8736.4646.05.4 4.948 25 22795 20.121 17877 15.983 14.37513.003 11.826 0810 9299161 7.89 69066496.11 5.480 4.956 27 23.560 20.707 18,327 16.330 14.643 13.21111987 10935 10027 9 237 7943 6.35 6.514 6.136 5.492 4964 2 24.316 21.261 18.764 16.683 14.69013.406 12.137 11051 10.116 9307 7964 6.961 6.534 6.152 5.502 4.970 29 25.066 21.844 19.188 16.98415.141 13.591 12.278 11.158 10.198 9370 8.022 6.983 6.51 6.16 5.510 4.975 30 25808 22.396 19.600 17.29215.372 13.765 12.409 11258 10 274 9427 8.0557.003 6.5656.175.517 4.979 40 32835 27.355 23.115 19.793 17.159 15.046 13.332 11925 10.757 9779 82447.105 6842 6.233 5.548 4.997 039.186 31.424 25,730 21.482 18.25 15.762 13.801 12233 10. 915 8307.133 66.246 5.5544.99 5: Reference Future Value of $1 | Periods | 2% | 3% | 4% | 5% | 6% 9% | 10% | 12% | 14% | 15% 1.010 | 1.020 1.030 | 1.040 | 1.050 | 1.060 | 1.070 1.00 1.090 | 1.100 | .120 | 1.140 | 1.150 2 1.020040 1051 1082 1.1032 1.145 1.61.188 .2102541.3c01323 3 10310501.125 1.1581.1911.225 1.2612951331 1.405 1482 1.521 4 1.041 1.01.126 170 1216 1262 131 1361412.4415746891749 5 10511.104 1.159 12171276133 1.40314691.5391.611 1.762 19252011 6 1.062 1.1261.1942851.340 1419 1.501 1.587 1.677 1.772 1.9742195 2.313 71.072 1.141.23013161407 50 1.0 1.714 1.828 1.942.211 2.502 2660 8 1.0831.1721287136914771594 1.7181.8511.9932.144 2.476 28533059 9 1.094 1.195 1.305 1423 1.551 189 1.838 1.99 2.172 2.358 2.773 3252 3518 10 1.1051.219 1.3441480129.79 1.9672.159 2.372.594 3.10637074.046 1% 11 1.11 1.243 1.384 1539 1710982.105 2.332 2.580 2.853 3.479 4.226 4652 12 1271.2381.426 18011.7662.012 2.2522.5132.8133.1383.8364.3185.350 13 .138 1.294461.6E51.886 2.133 2.410 2.7203.0683.4524.363 582 6.153 14 1.141319 1.513 1.73219802.26 2.579 2.937 3.3423.798 4.887 6.261 7076 15 116 1.346558180120792.397 2.7593.172 3.6424.1775.4747.1388.137 1 1731.3731.605 18732183 2.5402.952 3.4233.9704.595.130 8.137 9.358 171.1841.4001653 1.948 2.2922.6933.159 3.70 4.3285.054f.86 9.27610.76 18 1.198 | 1.428 | 1.702 | 2026 | 2407 | 2.854 | 3.380 3.996 | 4.717 | 5.560 7.690 | 10.58 | 12.38 19 | 120B | 1.457 | 1.754 | 2.107 | 2.527 | 3.026 | 3.617 4.31 | 5.142 .116 | 8.613 | 12.00 | 14.23 20 | 1.220 | 1.436 | 1.806 | 2191 | 2.653 | 3.207 | 3.870 | 4.661 | 5.604 | 6.727 | g646 | 13.74 | 16.37 21 1.232 | 1.516 | 1.880 | 2.279 | 2.786 | 3.400 | 4.141 5.034 | 0.109 | 7.400 | 10.80 | 15.67 | 18.82 22 1.245 | 1546 | 1916 | 2370 | 2.925 | 3.604 | 4.430 5.437 5559 8.140 | 12.10 | 17.86 | 21.64 23 1.2571.5771.9742465 3.0723.820 4.7415.8717.2588.95413.55 20.3624.89 24 1.270 1.608 2033 2563 3.225 4.049 5072 6.3417.9119.850 15.18 23.2128.63 25 1.282 1.641 2094 2666 3.386 4.292 5427 6.8488.623 10.83 17.00 26.46 32.92 26 1.295 1.6732.157277235564.549 5.807 7.3939.399 11.92 19.0430.1737.86 27 .3081.707 222128B3 3.7334.8226.214 7.8 10.25 13.11 21.32 34.3943.54 28 1.321 1.741 2.288 2993.9205.112 6.649 8.627 1117 14.42 23.88 39.2050.07 291.3351.77 2357 3119 4.116 54187114 9.317117 626.75 44.6957.58 301.3481.811 2427 3243 4.322 5743 7.612 00 1327 1745 29.96 50.5 66.21 401.4892.208 326248017.0400.29 14.9721.72 314145.26 93.05 188.9 267.9 50 1.645 2.63 4347.107 1147 18.42 29.4546.9 74.36 1174 289.0 700.2 1084 Future Value of Ordinary Annuity of $1 Periods 1 6% | 7% | 8% | 9% | 10% | 12% | 14% | 15% 1 | 1.000 | 1.000 I 1.000 | 1.000 | 1.000 | 1.000 1.000 | 1.000 | 1.000 | 1.000 | 1.000 | 1.000 | 1.000 2 2.010 2.020 2.030 2.0402.050 2.060 2.070 2.080 2.090 2.100 2.1202.140 2.150 3 3.030 3.0603.0913.1223.153 3.184 3.215 3.246 3.278 3.310 3.3743.4403.473 4 4.060 4.122 4.184 4.246 4.310 4.375 4440 4.506 4.573 4641 4.7794.924.993 |% | 2% | 3% | 4% | 5% | 6 6.152 6.308 6468 6.633 6.802 6.975 7.153 7.336 7.523 7.716 8.115 8.536 8.754 7 7.214 7434 7.662 7.898 8.142 8.394 8.6548.9239.2009487 10.09 10.73 11.07 88.286 8.5838.892 9.214 9.5499.897 10.260 10.6411.03 11.44 12.30 13.23 13.73 99.369 9.755 10.16 10.58 11.03 11.49 11.98 12.49 1302 3.58 14.78 16.09 16.79 10 10,46 10.9511.46 12.01 12.58 13.18 13.82 14,49 15.19 15.94 17.55 19.3420.30 11 11.57 12.17 12.81 13.4914.2114.97 15.78 16.65 17.56 18.5320.65 23.0424.35 12 12.68 13.41 14.19 15.03 15.92 16.87 17.89 18.98 20.14 21.38 24.13 27.2729.00 13 | 13.81 | 14.68 | 15.62 | 16.63 | 17.71 | 18.88 | 20.14 21.50 | 22.95 | 24.52 | 28.03 | 32.09 | 34.35 15 16.10 17.29 18.60 20.02 21.58 23.28 25.13 27.15 29.3631.77 37.28 43.84 47.58 16 17.26 18.64 20.16 21.82 23.66 25.6727.8930.32 33.00 35.95 42.75 50.98 55.72 17 18.43 20.01 21.76 23.7025.84 28.21 30.84 33.75 36.97 40.54 48.8859.1265.08 18 | 1951 | 21.41 | 23.41 | 25.65 | 28.13 | 30.91 | 34.00 3745 | 41.30 | 45.60 | 55.75 | 68.39 | 75.84 19 20.81 22.B4 25.12 27.67 30.54 33.75 37.38 41.4546.0251.1 63.44 78.97 88.21 20 22.02 24.30 26.87 29.78 33.0736.79 41.00 45.76 51.16 57.28 72.05 91.02 102.4 21 23.24 25.78 28.68 31.97 35.72 39.99 |44.87 50,4256.76 64.00 81.70 104.8118.8 22 24.47 27.30 30.54 34.25 38.5143.3949.01 55.46 62.87 7140 92.50 120.4 137.6 23 25.72 28.85 32.45 36.624143 47.00 53.44 60.89 69.53 79.54 104.6 138.3159.3 24 | 26.97 30.42 | 3443 | 39.08 | 44.50 | 50.82 | 58.18 | 6676 | 76.79 | 88.50 | 1182 | 1587 | 184.2 25 2B.24 32.03 364641.65 47.73 54.B 63.25 73.11 84.7099.35 133.3 181.9 212.8 26 29.53 33.67 38.55 44.31 51. 59.16 68.68 79.95 93.32 109.2 150.3 208.3 245.7 27 30.82 35.34 40.71 47.08 54.67 63.71 74.48 87.35 102.7 21. 169.4 238.5 283.6 28 32.13 37.05423 49.97 58.40 68.53 80.70 95.34 113.0 134.2 190.72729 327.1 29 33.45 38.7945.22 52.9762.32 73.64 87.35 104.0 124.1 148.6 214.6312.1 377.2 30 I 34.78 | 40.57 | 47.58 | 56.08 | 6644 | 79.06 | 94.46 113.3 | 136.3 | 104.5 | 241.3 3568 | 434.7 40 48.89 60.40 75.40 95.03120.8154.8 199.6 259.1 337.9 442.6 767.1 1.3421.779 50 64.46 84.5 1128152.7209.3|290.3406.5 573.8 815.,164 2,4004,9957,218