P12-58A compare investments with different cash flows and residual values (learning Objectives 2 & 4) Scribbles Inc. operates a chain of coffee shops.

P12-58A Compare investments with different cash flows and residual values (Learning Objectives 2 & 4) Scribbles Inc. operates a chain of coffee shops. The company is considering two possible expansion plans. Plan A would open eight smaller shops at a cost of $8,440,000. Expected annual net cash inflows are $1,400,000 with zero residual value at the end of ten years. Under Plan B, Scribbles would open three larger shops at a cost of $8,340,000. This plan is expected to generate net cash inflows of $1,200,000 per year for ten years, the estimated life of the properties. Estimated residual value is $1,075,000. Scribbles uses straight line depreciation and requires an annual return of 8%. Requirements 1. 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 Scribbles choose? Why? 3. Estimate Plan A's IRR. How does the IRR compare with the company's required rate of return