More Info - The company is considering two possible expansion plans. Plan A would open eight smaller shops at a cost of $8,600,000. 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, Lukes Company would open three larger shops at a cost of $8,240,000. This plan is expected to generate net cash inflows of $1,070,000 per year for 10 years, the estimated useful life of the properties. Estimated residual value for Plan B is $990,000. Lukes Company uses straight-line depreciation and requires an annual return of 8%. Print Done Reference Present Value of $1 Periods 1% 2% 3% 4% 5% Period 1 0.990 0.980 0.971 0.962 0.952 Period 2 0.980 0.961 0.943 0.925 0.907 Period 3 0.971 0.942 0.915 0.889 0.864 Period 4 0.961 0.924 0.888 0.855 0.823 Period 5 0.951 0.906 0.863 0.822 0.784 6% 0.943 0.890 0.873 7% 8% 0.935 0.926 0.857 0.840 0.816 0.794 0.792 0.763 0.735 Period 6 0.942 0.888 0.837 0.790 0.746 Period 7 0.933 0.871 0.813 0.760 0.711 Period 8 0.923 0.853 0.789 Period 9 0.914 0.837 0.766 0.747 0.705 0.666 0.665 0.623 0.713 0.681 0.731 0.677 0.627 0.582 0.703 0.645 0.592 Period 10 0.905 0.820 0.744 0.676 0.614 0.558 0.508 9% 10% 12% 14% 15% 16% 18% 20% 0.917 0.909 0.893 0.877 0.870 0.862 0.847 0.833 0.842 0.826 0.797 0.769 0.756 0.743 0.718 0.694 0.772 0.751 0.712 0.675 0.658 0.641 0.609 0.579 0.708 0.683 0.636 0.592 0.572 0.552 0.516 0.482 0.650 0.621 0.567 0.519 0.497 0.476 0.437 0.402 0.630 0.596 0.564 0.507 0.456 0.432 0.410 0.370 0.335 0.583 0.547 0.513 0.452 0.400 0.376 0.354 0.314 0.279 0.540 0.502 0.467 0.404 0.351 0.327 0.305 0.266 0.233 0.544 0.500 0.460 0.424 0.361 0.308 0.284 0.263 0.225 0.194 0.463 0.422 0.386 0.322 0.270 0.247 0.227 0.191 0.162 Period 11 Period 12 0.896 0.804 0.722 0.887 0.788 Period 13 0.879 0.773 0.681 0.650 0.585 0.527 0.475 0.429 0.701 0.625 0.557 0.497 0.444 0.397 0.601 0.530 0.469 0.415 0.368 Period 14 0.870 0.758 0.661 Period 15 0.861 0.743 0.642 0.555 0.481 0.417 0.577 0.505 0.442 0.388 0.340 0.362 0.388 0.350 0.287 0.237 0.215 0.195 0.162 0.135 0.356 0.319 0.257 0.208 0.187 0.168 0.137 0.112 0.326 0.290 0.229 0.182 0.163 0.145 0.116 0.093 0.299 0.263 0.205 0.160 0.141 0.125 0.099 0.078 0.315 0.275 0.239 0.183 0.140 0.123 0.108 0.084 0.065 Period 16 0.853 0.728 0.623 0.534 0.458 0.394 0.339 0.292 Period 17 0.844 0.714 0.605 0.513 0.436 0.371 0.317 0.270 Period 18 0.836 0.700 0.587 0.494 0.416 0.350 0.296 Period 19 0.828 0.686 0.570 0.475 0.396 Period 20 0.820 0.673 0.554 0.456 0.377 0.331 0.312 Period 21 0.811 0.660 0.538 0.439 0.359 0.294 Period 22 0.803 0.647 0.522 0.422 0.342 0.278 Period 23 0.795 0.634 0.507 0.406 0.326 Period 24 0.788 0.622 0.492 0.390 0.310 Period 25 0.780 0.610 0.478 0.375 0.295 0.233 0.262 0.247 0.252 0.218 0.163 0.123 0.107 0.093 0.071 0.054 0.231 0.198 0.146 0.108 0.093 0.080 0.060 0.045 0.250 0.212 0.180 0.130 0.095 0.081 0.069 0.051 0.038 0.277 0.232 0.194 0.164 0.116 0.083 0.070 0.060 0.043 0.031 0.258 0.215 0.178 0.149 0.104 0.073 0.061 0.051 0.037 0.026 0.242 0.199 0.164 0.135 0.093 0.064 0.053 0.044 0.031 0.022 0.226 0.184 0.150 0.123 0.083 0.056 0.046 0.038 0.026 0.018 0.211 0.170 0.138 0.112 0.074 0.049 0.040 0.033 0.022 0.015 0.197 0.158 0.126 0.102 0.066 0.043 0.035 0.028 0.019 0.013 0.184 0.146 0.116 0.092 0.059 0.038 0.030 0.024 0.016 0.010 Print Done Lukes Company operates a chain of sandwich shops. (Click the icon to view additional information.) Read the requirements. 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.) Plan A Plan B Amount invested 8600000 8240000 Expected annual net cash inflow 1600000 Payback 5.4 years 1070000 7.7 years 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 Plan A Plan B + = ARR % % (Click the icon to view Present Value of $1 table.) (Click the icon to view Present Value of Ordinary Annuity of $1 table.) (Click the icon to view Future Value of $1 table.) (Click the icon to view Future Value of Ordinary Annuity of $1 table.) 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: Years 1-10 Present value of annuity 10 Present value of residual value Net Cash Inflow Annuity PV Factor (i=8%, n=10) PV Factor Present (i=8%, n=10) Value Choose from any list or enter any number in the input fields and then continue to the next question. Lukes Company operates a chain of sandwich shops. (Click the icon to view additional information.) Read the requirements. Plan B: Years 1-10 Present value of annuity 10 Present value of residual value Total PV of cash inflows 0 Initial Investment Net Cash Inflow Annuity PV Factor (i=8%, n=10) PV Factor Present (i=8%, n=10) Value 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 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 Is based on cash flows, can be used to assess profitability, and takes into account Choose from any list or enter any number in the input fields and then continue to the next question. (Click the icon to view Present Value of $1 table.) (Click the icon to view Present Value of Ordinary Annuity of $1 table.) (Click the icon to view Future Value of $1 table.) (Click the icon to view Future Value of Ordinary Annuity of $1 table.) Lukes Company operates a chain of sandwich shops. i (Click the icon to view additional information.) Read the requirements. 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 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 Lukes Company choose? Why? (Click the icon to view Present Value of $1 table.) (Click the icon to view Present Value of Ordinary Annuity of $1 table.) (Click the icon to view Future Value of $1 table.) (Click the icon to view Future Value of Ordinary Annuity of $1 table.) Lukes Company should invest in because it has a payback period, a ARR, 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 Choose from any list or enter any number in the input fields and then continue to the next