Lajos Company operates a chain of sandwich shops.
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.) Calculate the ARR (accounting rate ofreturn) for both plans. (Round your answers to the nearest tenthpercent, X.X%.).
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.)
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.)
Calculate the profitability index of these two plans. (Round to two decimal places X.XX.)
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.
Requirement 3. Which expansion plan should Lajos CompanyLajos Company choose? Why?
i More Info The company is considering two possible expansion plans. Plan A would open eight smaller shops at a cost of $8,550,000. 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, Lajos Company would open three larger shops at a cost of $8,100,000. This plan is expected to generate net cash inflows of $1,000,000 per year for 10 years, the estimated useful life of the properties. Estimated residual value for Plan B is $990,000. Lajos Company uses straight-line depreciation and requires an annual return of 7%. Print Print [ Done] Done 0 Reference Periods 4% 0.962 0.925 0.889 0.855 0.822 0.790 12% 0.893 0.797 0.712 0.636 0.567 0.507 0.452 16% 0.862 0.743 0.641 0.552 0.476 0.410 0.354 0.760 0.305 0.731 0.703 0.676 0.650 1% 2% 0.990 0.980 0.980 0.961 0.942 0.961 0.924 0.951 0.906 0.942 0.888 0.933 0.871 0.923 0.853 0.914 0.837 0.905 0.820 0.896 0.804 0.887 0.788 0.879 0.773 0.8700.758 0.861 0.743 0.853 0.728 0.844 0.714 0.836 0.700 0.828 0.686 0.820 0.673 0.811 0.660 0.803 0.647 0.795 0.634 0.788 0.622 0.780 0.610 0.772 0.598 14% 0.877 0.769 0.675 0.592 0.519 0.456 0.400 0.351 0.308 0.270 0.237 0.208 0.182 0.160 0.140 3% 0.971 0.943 0.915 0.888 0.863 0.837 0.813 0.789 0.766 0.744 0.722 0.701 0.681 0.661 0.642 0.623 0.605 0.587 0.570 0.554 0.538 0.522 0.507 0.492 0.478 0.464 0.112 5% 6% 0.952 0.943 0.907 0.890 0.864 0.840 0.823 0.792 0.784 0.747 0.746 0.705 0.7110.665 0.677 0.627 0.645 0.592 0.614 0.558 0.585 0.527 0.557 0.497 0.530 0.469 0.505 0.442 0.481 0.417 0.458 0.394 0.436 0.371 0.416 0.350 0.396 0.331 0.377 0.312 0.359 0.294 0.342 0.278 0.326 0.262 0.310 0.247 0.295 0.233 0.281 0.220 Present Value of $1 7% 8% 9% 0.935 0.926 0.917 0.873 0.857 0.842 0.816 0.7940.772 0.763 0.735 0.708 0.713 0.681 0.650 0.666 0.630 0.596 0.623 0.583 0.547 0.582 0.540 0.502 0.544 0.500 0.460 0.508 0.463 0.422 0.475 0.429 0.388 0.444 0.397 0.356 0.415 0.368 0.326 0.388 0.340 0.299 0.362 0.315 0.275 0.339 0.292 0.252 0.317 0.270 0.231 0.296 0.250 0.212 0.277 0.232 0.194 0.258 0.215 0.178 0.242 0.199 0.164 0.226 0.1840.150 0.211 0.1700.138 0.197 0.158 0.126 0.184 0.116 0.172 0.135 0.106 10% 0.909 0.826 0.751 0.683 0.621 0.564 0.513 0.467 0.424 0.386 0.350 0.319 0.290 0.263 0.239 0.218 0.198 0.180 0.164 0.149 0.135 0.123 0.112 0.102 0.092 0.084 0.361 0.322 0.287 0.257 0.229 0.205 0.183 0.625 0.601 0.577 0.555 0.534 0.513 0.494 0.475 0.456 0.439 0.422 0.406 0.390 0.375 0.361 15% 0.870 0.756 0.658 0.572 0.497 0.432 0.376 0.327 0.284 0.247 0.215 0.187 0.163 0.141 0.123 0.107 0.093 0.081 0.070 0.061 0.053 0.046 0.040 0.035 0.030 0.026 0.263 0.227 0.195 0.168 0.145 0.125 0.108 0.093 18% 20% 0.847 0.833 0.7180.694 0.609 0.579 0.516 0.482 0.437 0.402 0.370 0.335 0.314 0.279 0.266 0.233 0.225 0.194 0.191 0.162 0.162 0.135 0.137 0.116 0.093 0.099 0.078 0.084 0.065 0.071 0.054 0.060 0.045 0.051 0.038 0.043 0.031 0.037 0.026 0.022 0.026 0.018 0.022 0.015 0.019 0.013 0.016 0.010 0.014 0.009 0.080 0.069 0.060 0.051 0.163 0.123 0.108 0.130 0.095 0.116 0.083 0.104 0.073 0.093 0.064 0.083 0.056 0.074 0.049 0.066 0.043 0.059 0.038 0.053 0.033 0.044 0.031 0.038 0.033 0.028 0.024 0.021 0.146 Print Done 0 Reference Periods 20% 0.833 1.528 2.106 3.630 ON 2.589 2.991 3.326 3.605 3.837 4.031 4.192 4.327 4.439 Present Value of Ordinary Annuity of $1 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 12% 14% 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909 0.893 0.877 1.970 1.942 1.913 1.886 1.859 1.833 | 1.8081.783 1.759 1.736 1.6901.647 2.9412.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487 2.402 2.322 3.902 3.808 3.717 3.546 3.465 3.387 3.312 3.240 3.170 3.037 2.914 4.853 4.713 4.580 4.452 4.329 | 4.212 4.100 3.993 3.890 3.791 3.605 3.433 5.795 5.601 5.417 5.242 5.076 4.917 4.767 4.623 4.486 4.355 4.111 3.889 6.728 6.4726.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868 4.564 4.288 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.747 | 5.535 5.335 4.968 4.639 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.995 5.759 5.328 4.946 9.471 8.983 8.530 8.111 7.722 7.360 7.024 6.710 6.418 6.145 5.650 5.216 10.368 9.787 9.253 8.760 8.306 7.887 7.499 7.139 6.805 6.495 5.938 5.453 11.255 10.575 9.954 9.385 8.863 8.384 | 7.943 7.5367.1616 .814 6.194 5.660 12.134 11.348 10.635 9.986 9.3948.853 8.358 7.904 7.487 7.103 6.424 5.842 13.004 12.106 11.296 10.563 9.899 9.295 8.745 8.244 7.786 7.367 6.628 6.002 13.865 12.849 11.938 11.118 10.380 9.712 9.108 8.559 7.606 6.811 6.142 14.718 13.578 12.561 11.652 10.838 10.106 9.447 8.851 8.313 7.824 6.974 6.265 15.562 14.292 13.166 12.166 11.274 10.477 9.763 9.122 8.544 8.022 7.120 6.373 16.398 14.992 | 13.754 12.659 11.690 10.828 10.059 9.372 8.756 8.201 7.250 6.467 17.226 15.678 14.324 13.134 12.085 11.158 10.336 9.604 8.950 8.365 7.366 6.550 18.046 16.351 14.877 13.590 12.462 11.470 10.594 9.818 9.129 8.514 7.469 6.623 18.857 17.011 15.415 14.029 12.821 11.764 10.836 10.017 9.292 8.649 7.562 6.687 19.660 17.658 15.937 14.451 13.163 12.042 11.061 10.201 | 9.442 8.772 7.645 6.743 20.456 18.292 16.444 14.857 13.489 12.303 | 11.272 10.371 | 9.580 8.883 7.718 6.792 21.243 18.914 16.936 15.247 13.799 12.550 11.469 10.529 9.707 8.985 7.784 6.835 22.023 19.523 17.413 | 15.622 14.094 12.783 11.654 10.675 | 9.823 9.077 7.843 6.873 22.795 20.121 | 17.877 15.983 14.375 13.003 11.826 10.810 9.929 9.1617.896 6.906 15% 16% 18% 0.870 0.862 0.847 1.626 1.605 1.566 2.283 2.246 2.174 2.855 2.798 2.690 3.352 3.274 3.127 3.784 3.685 3.498 4.160 4.039 3.812 4.487 4.344 4.078 4.772 4.607 4.303 5.019 4.833 | 4.494 5.234 5.029 4.656 5.421 5.197 | 4.793 5.583 5.342 4.910 5.724 5.468 5.008 5.847 5.575 5.092 5.954 5.669 5.162 6.047 5.222 6.128 5.818 5.273 6.198 5.877 5.316 6.259 5.929 5.353 6.312 5.973 5.384 6.3596.011 5.410 6.399 6.044 5.432 6.434 6.073 5.451 6.464 6.097 5.467 6.491 6.118 5.480 8.061 5.749 4.533 4.611 4.675 4.730 4.775 4.812 4.844 4.870 4.891 4.909 4.925 4.937 4.948 4.956 Print Done A Reference Future Value of $1 Periods 1% 1.010 1.020 1.030 1.041 1.051 1.062 1.072 1.083 1.094 1.105 1.116 1.127 1.138 1.149 1.161 1.173 1.184 1.196 1.208 1.220 3% 1.030 1.061 1.093 1.126 1.159 1.194 1.230 1.267 1.305 1.344 1.999 1.480 2% 1.020 1.040 1.061 1.082 1.104 1.126 1.149 1.172 1.195 1.219 1.243 1.268 1.294 1.319 1.346 1.373 1.400 1.428 1.457 1.486 1.516 1.546 1.577 1.608 1.629 4% 5% 6% 7% 8% 1.040 1.050 1.060 1.070 1.080 1.0821.1031.1241.145 1.166 1.125 1.158 | 1.191 1.225 1.260 1.170 1.216 1.262 1.311 1.360 1.217 1.276 1.338 1.403 1.469 1.265 1.340 1.419 1.501 1.587 1.316 1.407 1.504 1.606 1.714 1.369 1.477 1.594 1.718 1.851 1.423 1.551 1.689 1.838 1.967 2.159 1.539 1.710 1.898 2.105 2.332 1.601 | 1.796 2.012 2.252 2.518 1.665 1.886 2.133 2.410 2.720 1.732 1.980 2.261 2.579 2.937 1.801 2.079 2.397 2.759 3.172 1.873 2.183 2.540 2.952 3.426 1.948 2.292 2.693 3.159 3.700 2.026 2.407 2.854 3.380 3.996 2.107 2.527 3.026 3.617 4.316 2.191 2.653 3.207 3.870 4.661 2.279 2.786 3.400 4.141 5.034 2.370 2.925 3.604 4.430 5.437 2.465 3.072 3.820 4.741 5.871 2.563 3.225 4.049 5.072 6.341 2.666 3.386 4.292 5.427 6.848 2.772 3.556 4.549 5.8077.396 1.384 1.426 1.469 1.513 1.558 1.605 9% 1.090 1.188 1.295 1.412 1.539 1.677 1.828 1.993 2.172 2.367 2.580 2.813 3.066 3.342 3.642 3.970 4.328 4.717 5.142 5.604 6.109 6.659 7.258 7.911 8.623 9.399 14% 1.140 1.300 1.482 1.689 1.925 2.195 2.502 2.853 3.252 3.707 4.226 4.818 5.492 6.261 7.138 8.137 9.276 10% 1.100 1.210 1.331 1.464 1.611 1.772 1.949 2.144 2.358 2.594 2.853 3.138 3.452 3.798 4.177 4.595 5.054 5.560 6.116 6.727 7.400 8.140 8.954 9.850 10.83 11.92 12% 1.120 1.254 1.405 1.574 1.762 1.974 2.211 2.476 2.773 3.106 3.479 3.896 4.363 4.887 5.474 6.130 6.866 7.690 8.613 9.646 10.80 12.10 13.55 15.18 17.00 19.04 15% 1.150 1.323 1.521 1.749 2.011 2.313 2.660 3.059 3.518 4.046 4.652 5.350 6.153 7.076 8.137 9.358 10.76 12.38 14.23 16.37 18.82 21.64 24.89 28.63 32.92 37.86 1.653 10.58 1.232 1.245 1.257 1.270 1.702 1.754 1.806 1.860 1.916 1.974 2.033 2.094 12.06 13.74 15.67 17.86 20.36 23.21 26.46 30.17 1 641 1.295 1.673 2.157 Print Done Reference Future Value of Ordinary Annuity of $1 Periods 4.921 1% 1.000 2.010 3.030 4.060 5.101 6.152 7.214 8.286 9.369 10.46 11.57 12.68 13.81 14.95 16.10 17.26 18.43 19.61 20.81 22.02 23.24 24.47 25.72 26.97 28.24 29.53 2% 1.000 2.020 3.060 4.122 5.204 6.308 7.434 8.583 9.755 10.95 12.17 13.41 14.68 15.97 17.29 3% 1.000 2.030 3.091 4.184 5.309 6.468 7.662 8.892 10.16 11.46 12.81 14.19 15.62 17.09 18.60 20.16 21.76 23.41 25.12 26.87 28.68 30.54 32.45 34.43 36.46 38.55 4% 5% 6% 7% 1.000 1.000 1.000 1.000 2.040 2.050 2.060 2.070 3.122 | 3.153 3.184 3.215 4.246 4.310 4.375 4.440 5.416 5.526 5.637 5.751 6.633 6.802 6.975 7.153 7.898 8.142 8.394 8.654 9.214 9.549 9.897 10.260 10.58 11.03 11.49 11.98 12.01 12.58 13.18 13.82 13.49 14.21 14.97 15.78 15.03 15.92 16.87 17.89 16.63 17.71 18.88 20.14 18.29 19.60 21.02 22.55 20.02 21.58 23.28 25.13 21.82 23.66 25.67 27.89 23.70 25.84 28.21 30.84 25.65 28.13 34.00 27.67 30.54 33.76 37.38 29.78 33.07 36.79 41.00 35.72 39.99 44.87 34.25 38.51 43.39 49.01 36.62 41.43 47.00 53.44 39.08 44.50 50.82 58.18 41.65 47.73 54.86 63.25 44.31 51.11 59.16 68.68 8% 1.000 2.080 3.246 4.506 5.867 7.336 8.923 10.64 12.49 14.49 16.65 18.98 21.50 24.21 27.15 30.32 33.75 37.45 41.45 45.76 50.42 55.46 60.89 66.76 73.11 79.95 9% 10% 12% 14% 1.000 1.000 1.000 1.000 2.090 2.100 2.120 2.140 3.278 | 3.310 3.374 3.440 4.573 4.641 4.779 5.985 6.105 6.353 6.610 7.523 7.716 8.115 8.536 9.2009.487 10.09 10.73 11.03 11.44 12.30 13.23 13.02 13.58 14.78 16.09 15.19 15.94 17.55 19.34 17.56 18.53 20.65 23.04 20.14 21.38 24.13 27.27 22.95 24.52 28.03 26.02 27.98 32.39 37.58 29.36 31.77 37.28 43.84 33.00 35.95 42.75 50.98 36.97 40.54 48.88 59.12 41.30 45.60 55.75 68.39 46.02 51.16 63.44 78.97 51.16 57.28 72.05 91.02 56.76 64.00 81.70 104.8 62.87 71.40 92.50 120.4 69.53 79.54 104.6 138.3 76.79 88.50 118.2 158.7 84.70 98.35 133.3 181.9 93.32 109.2 | 150.3 208.3 32.09 15% 1.000 2.150 3.473 4.993 6.742 8.754 11.07 13.73 16.79 20.30 24.35 29.00 34.35 40.50 47.58 55.72 65.08 75.84 88.21 102.4 118.8 137.6 159.3 184.2 212.8 245.7 30.91 18.64 20.01 21.41 22.84 24.30 25.78 27.30 28.85 30.42 32.03 33.67 31.97 Print Done 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.) Amount invested 1 = Plan A 8,550,000 8,100,000 Expected annual net cash inflow 1,600,000 1,000,000 Payback 5.3 years 8.1 years Plan B Calculate the ARR (accounting rate of return) for both plans. (Round your answers to the nearest tenth percent, X.X%.) Average annual operating income Average amount invested 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: Present Net Cash Inflow Annuity PV Factor (i=7%, n=10) PV Factor (i=7%, n=10) Years Value Present value of annuity 1 - 10 10 Present value of residual value Total PV of cash inflows O Initial Investment Net present value of Plan A Calculate the NPV of Plan B. (Complete all answer boxes. Enter a "O" 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.) Present Plan B: Years Net Cash Inflow Annuity PV Factor (i=7%, n=10) PV Factor (i=7%, n=10) Value 1 - 10 Present value of annuity 10 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 Average amount invested Average annual operating income Requireme Initial investment Present value of net cash inflows Match the ti s of these capital budgeting methods? I for each of the four capital budgeting models. 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 v 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. easy to understand, is based on cash flows, and highlights risks. ARR Net present value Payback method Profitability index 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. 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 v 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 Lajos Company choose? Why? Lajos Company should invest in because it has a payback period, a net present value, and a 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 This rate the company's hurdle rate of 7%
