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, Lemons Company would open three larger shops at a cost of $8,240,000. This plan is expected to generate net cash inflows of $1,100,000 per year for 10 years, the estimated useful life of the properties. Estimated residual value for Plan B is $1,000,000. Lemons Company uses straight-line depreciation and requires an annual return of 7%. Print Done 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 Lemons Company choose? Why? 4. Estimate Plan A's IRR. How does the IRR compare with the company's required rate of return? 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 Expected annual net cash inflow Payback 5.3 years Plan A $ 8,550,000 1,600,000 1,100,000 Plan B $ 8,240,000 7.5 years Calculate the ARR (accounting rate of return) for both plans. (Round your answers to the nearest tenth percent, X.X%.) . Average amount invested = ARR Plan A $ Average annual operating income 745,000 376,000 4,275,000 17.4 % $ $ Plan B $ 4,620,000 = 8.1 % 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: Net Cash PV Factor Present Annuity PV Factor (i=7%, n=10) Years Inflow (i=7%, n=10) Value 1 - 10 Present value of annuity $ 1,600,000 7.024 $ 11,238,400 10 0 Present value of residual value 0 Total PV of cash inflows 11,238,400 (8,550,000) 0 Initial Investment $ 2,688,400 Net present value of Plan A 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.) Plan B: Net Cash Annuity PV Factor PV Factor Present Years Inflow (i=7%, n=10) (i=7%, n=10) Value 1 - 10 Present value of annuity $ 1,100,000 7.024 $ 7,726,400 10 0.508 1,000,000 Present value of residual value 508,000 Total PV of cash inflows 8,234,400 (8,240,000) 0 Initial Investment (5,600) Net present value of Plan B Calculate the profitability index of these two plans. (Round to two decimal places X.XX.) Initial investment = Profitability index III Plan A Plan B . 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, Lemons Company would open three larger shops at a cost of $8,240,000. This plan is expected to generate net cash inflows of $1,100,000 per year for 10 years, the estimated useful life of the properties. Estimated residual value for Plan B is $1,000,000. Lemons Company uses straight-line depreciation and requires an annual return of 7%. Print Done 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 Lemons Company choose? Why? 4. Estimate Plan A's IRR. How does the IRR compare with the company's required rate of return? 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 Expected annual net cash inflow Payback 5.3 years Plan A $ 8,550,000 1,600,000 1,100,000 Plan B $ 8,240,000 7.5 years Calculate the ARR (accounting rate of return) for both plans. (Round your answers to the nearest tenth percent, X.X%.) . Average amount invested = ARR Plan A $ Average annual operating income 745,000 376,000 4,275,000 17.4 % $ $ Plan B $ 4,620,000 = 8.1 % 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: Net Cash PV Factor Present Annuity PV Factor (i=7%, n=10) Years Inflow (i=7%, n=10) Value 1 - 10 Present value of annuity $ 1,600,000 7.024 $ 11,238,400 10 0 Present value of residual value 0 Total PV of cash inflows 11,238,400 (8,550,000) 0 Initial Investment $ 2,688,400 Net present value of Plan A 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.) Plan B: Net Cash Annuity PV Factor PV Factor Present Years Inflow (i=7%, n=10) (i=7%, n=10) Value 1 - 10 Present value of annuity $ 1,100,000 7.024 $ 7,726,400 10 0.508 1,000,000 Present value of residual value 508,000 Total PV of cash inflows 8,234,400 (8,240,000) 0 Initial Investment (5,600) Net present value of Plan B Calculate the profitability index of these two plans. (Round to two decimal places X.XX.) Initial investment = Profitability index III Plan A Plan B