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.

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 Lemons Company choose? Why?

Lemons 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$\text{'}$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 $8\%.$