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Projected net cash inflows are as follows: Year 1. Year 2..... I a l . . . . . . . . . . . . . . . . . . Year 3..... T a l u . . . . . . . . . . . . . . $261,000 $255,000 $225,000 $211,000 $200,000 $178,000 Year 4.................. Year 5... I a l . . . . . . . . . . . . . . . . . . Year 6.................. Present Value of $1 Period 10% 12% 14% 16% 0.893 0.877 0.862 0.909 0.826 0.751 0.797 0.769 0.743 0.712 0.675 0.641 0.683 0.636 0.592 0.552 0.657 0.519 0.476 0.507 0.456 0.621 0.564 0.513 0.467 0.452 0.400 0.404 0.410 0.354 0.305 0.263 0.227 0.424 0.351 0.308 0.270 0.361 0.386 0.322 Present Value of Annuity of $1 Periods 10% 12% 14% 16% 0.909 0.877 0.862 1.647 1.605 0.893 1.690 2.402 3.037 3.605 2.322 1.736 2.487 3.170 3.791 2.246 2.914 2.798 3.433 3.274 4.355 4.111 3.889 3.685 4.868 4.564 4.288 4.039 5.335 4.968 4.639 4.344 5.759 5.328 4.946 4.607 6.145 5.650 5.216 4.833 Future Value of $1 Period 10% 12% 14% 16% 1.120 1.140 1.160 1.100 1.210 1.331 1.254 1.300 1.346 1.561 1.405 1.482 1.464 1.574 1.689 1.811 2.100 1.611 1.762 1.925 1.772 1.974 2.195 1.949 2.211 2.502 2.436 2.826 3.278 3.803 2.853 2.144 2.358 2.476 2.773 3.106 3.252 3.707 2.594 4.411 Period 16% Future Value of Annuity of $1. 10% 12% 14% 1.000 1.000 1.000 2.100 2.120 2.140 1.000 2.160 3.310 3.374 3.440 3.506 5.066 4.641 4.779 4.921 6.610 6.105 6.353 6.877 7.716 8.536 8.977 9.487 10.730 8.115 10.089 12.300 14.776 13.233 11.436 13.579 15.937 11.414 14.240 17.519 21.321 16.085 19.337 17.549 Abrahms operates a chain of sub shops. The company is considering two possible expansion plans. Plan A would open eight smaller shops at a cost of $8,540,000. Expected annual net cash inflows are $1,650,000 with zero residual value at the end of 9 years. Under Plan B, Abrahms would open three larger shops at a cost of $8,340,000. This plan is expected to generate net cash inflows of $1,450,000 per year for 9 years, the estimated life of the properties. Estimated residual value is $975,000. Abrahms uses straight-line depreciation and requires an annual return of 6% (Click the icon to view the present value annuity factor table.) : (Click the icon to view the present value factor table.) B (Click the icon to view the future value annuity factor table.) Click the icon to view the future value factor table.) 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 Abrahms choose? Why? 3. Estimate Plan A's IRR. How does the IRR compare with the company's required rate of return? Requirement 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? Begin by computing the payback period for both plans. (Round your answers to one decimal place.) Plan A years Plan B L years Now compute the ARR (accounting rate of return) for both plans. (Round the percentages to the nearest tenth percent.) Plan A Plan B Next compute the NPV (net present value) under each plan. Begin with Plan A, then compute Plan B. (Round your answers to the nearest whole dollar and use parentheses or a minus sign to represent a negative NPV.) Net present value of Plan A Net present value of Plan B Requirement 2. Which expansion plan should Abrahms choose? Why? Recommendation: Invest in . It has the net present value. It also has a payback period. Requirement 3. Estimate Plan A's IRR. How does the IRR compare with the company's required rate of return? Compare the IRR 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 6%