Question Help P26-31A (similar to) Leches Company operates a chain of sandwich shops. (Click the icon to view additional information) Read the requirements Click the icon to view Present Value of $1 table) (Click the con 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) 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. XX) Plan A 1 Payback years years Plan B Requirements 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 $1,550,000 for 10 years, with zero residual value at the end of 10 years. Under Plan B, Leches Company would open three larger shops at a cost of $8.150.000 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 Bis $1,200,000. Leches Company uses straight-line depreciation and requires an annual return of 10% 1. Compute the payback, the ARR, the NPV, and the proftability index of these two plans 2. What are the strengths and weaknesses of these capital budgeting methods? 3. Which expansion plan should Leches Company choose? Why? 4. Estimate Plan A'SIRR How does the IRR compare with the company's required rate of return? Print Dono Print Done Hererence lcon able.) uirem ble.) Periods 1 2 at 1. 4 5 payb 0507 6 7 9 10 0287 re Info 11 12 13 14 15 Present Value of $1 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 12% 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909 0.893 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826 0.797 0.971 0.942 0.915 0.889 0.864 0 840 0.816 0.794 0.772 0.751 0.712 0.951 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683 0.636 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621 0.567 0.942 0.888 0837 0.790 0.746 0.705 0 686 0.630 0.596 0.564 0.933 0.871 0813 0.750 0.711 0.665 0.623 0.583 0.547 0.513 0.452 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467 0.404 0.914 0.837 0.766 0.703 0645 0.592 0.544 0.500 0.460 0.424 0.361 0.905 0.820 0.744 0676 0.614 0.558 0.508 0.463 0422 0.386 0.322 0.896 0.804 0.722 0.650 0.585 0527 0475 0.429 0.388 0.350 0.887 0.788 0701 0.625 0.557 0497 0.444 0397 0.356 0.319 0.257 0879 0.773 0.601 0.530 0.469 0.415 0.368 0.326 0.290 0.229 0.870 0.758 0.661 0577 0.505 0442 0388 0.340 0.299 0.263 0205 0.861 0.743 0.642 0.555 0.481 0417 0.362 0.315 0.275 0.239 0.183 0.853 0.728 0.623 0.534 0.458 0394 0339 0.292 0252 0218 0.163 0.844 0.714 0.605 0.513 0436 0371 0.317 0.270 0231 0.198 0.146 0.836 0.700 0.587 0.494 0.4160350 0.296 0250 0212 0.180 0.130 0828 0.686 0.570 0.475 0.331 0.277 0.232 0.194 0.164 0.115 0.820 0.673 0.5540456 0.377 0.312 0.258 0.215 0.178 0.149 0.104 0.811 0.660 0.538 0.439 0.359 0.294 0242 0.199 0.1640.135 0.093 0.803 0.647 0.522 0.422 0.342 0.278 0226 0.1840.150 0.123 0.083 0.795 0.634 0507 0.406 0.326 0.262 0.211 0.170 0.138 0.112 0.074 0788 0.622 0.492 0.390 0.310 0247 0.197 0.158 0.126 0.102 0.066 0.780 0.610 0.478 0.375 0.296 0.233 0.184 0.146 0.116 0.092 0.059 0.772 0.598 0.464 0.361 0.281 0.172 0.135 0.106 0.084 0.053 0.764 0.586 0.450 0.347 0.268 0.207 0.161 0.125 0.098 0.076 0.047 0.757 0.574 0437 0.333 0.255 0.196 0.150 0.116 0.090 0.069 0.042 0.7490.563 0.424 0.321 0.243 0.185 0.141 0.107 0.082 0.063 0.037 0.742 0.552 0.412 0.308 0.231 0.174 0.131 0.099 0.075 0.057 0.033 0.672 0453 0.307 0.200 0.142 0.097 0.067 0.046 0.032 0.022 0.011 0.608 0.372 0.228 0.141 0.087 0.054 0.034 0.021 0.013 0.009 0.003 14% 15% 16% 18% 20% 0.877 0.870 0.862 0.847 0.833 0.789 0.756 0.743 0.718 0.694 0.675 0.658 0.641 0609 0.579 0.592 0.572 0.552 0.516 0.482 0.519 0.497 0.476 0.437 0.402 0.456 0.432 0.410 0.370 0.335 0.400 0.376 0.354 0.3140.279 0.351 0.327 0.305 0.266 0.233 0.30B 0.284 0.263 0.225 0.194 0.270 0.247 0227 0.191 0.162 0237 0215 0.195 0.162 0.135 0 208 0.187 0.168 0.137 0.112 0.182 0.163 0.145 0.116 0.093 0.160 0.141 0.125 0.099 0.078 0.140 0.123 0.108 0.084 0.065 0.123 0.107 0.093 0.071 0.054 0.108 0.093 0.080 0.060 0.045 0.095 0.081 0.069 0.051 0.038 0.083 0.060 0.043 0.031 0.073 0.061 0.051 0.037 0.026 0.064 0.053 0.044 0.031 0.022 0056 0.046 0.038 0.026 0.018 0.049 0.040 0.033 0.022 0.015 0043 0.035 0.028 0.019 0.013 0.038 0.030 0.024 0.016 0.010 0033 0.026 0.021 0.014 0.009 0.029 0.023 0.018 0.011 0.007 0.026 0.020 0.016 0.010 0.006 0.022 0.017 0.014 0008 0.005 0.020 0.015 0.012 0.007 0.004 0.005 0.0040.003 0.001 0.001 0.001 0.001 0.001 Index of thes 16 17 18 19 20 0.396 pany mallers 000 for Leches en is ex he estir 200,000 return 0.070 pting method 2 mpany's 21 22 23 24 25 0220 26 27 28 29 30 40 50 many Print Done Clear All Check Answer ng icon able.) 7 uirem ble.) 14% Periods 1 20% 0.833 1.528 2108 2589 2991 2 3 4 5 t 1. c payb 6 7 8 9 10 3.326 3.605 3.837 4.031 4.192 re Info 11 12 13 14 15 Present Value of Ordinary Annuity of $1 1% 2% 3% 4% 5% 7% 8% 9% 10% 12% 15% 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909 0.893 0.877 0870 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736 1.690 1.647 1.626 2.941 2.884 2.829 2775 2.723 2.673 2.624 2577 2.531 2.487 2.402 2322 2283 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170 3.037 2914 2.855 4853 4.713 4.580 4452 4.329 4.212 4.100 3.993 3.890 3.791 3.605 3433 3.352 5.795 5,601 5.417 5.242 5,076 4.917 4.767 4.623 4.486 4.355 4.111 3.889 3.784 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868 4.564 4288 4.160 7.652 7325 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.335 4.968 4.639 4487 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.995 5.759 5.328 4.946 4.772 9.471 8.983 8.530 8.111 7.722 7.360 7.024 6.710 6.418 6.145 5.650 5.216 5.019 10.368 9.787 9.253 8.780 8.306 7.887 7.499 7.139 6.805 6.495 5.938 5.453 5.234 11.255 10.575 9.954 9.385 8.863 8384 7.943 7.536 7.161 6.814 6.194 5660 5421 12.134 11.348 10.635 9.986 9.394 8.853 8.358 7.904 7.487 7.103 6.424 5.842 5.583 13.004 12.106 11.296 10.563 9.899 9 295 8.745 8 244 7.786 7.357 6.628 6.002 5.724 13 865 12.849 11.938 11.118 10.380 9.712 9.108 8.559 8.061 7.606 6.811 6.142 5.847 14.718 13.578 12.561 11.652 10.838 10.106 9.447 8.851 8.313 7.824 6.974 6.265 5.954 15.562 14 292 13.166 12. 166 11 274 10.477 9.763 9.122 8.544 8.022 7.120 6.373 6.047 16.398 14.992 13.754 12.659 11.690 10.828 10.059 9.372 8.756 8.201 7.250 6.467 6.128 17.226 15.678 14.32413.13412.085 11.158 10.336 9.604 8.950 8.365 7.366 6.550 6.198 18.046 16.351 14.877 13.590 12.462 11.470 10.5949.818 9.129 8.514 7.469 6.623 6.259 18.857 17.011 15.415 14.029 12.821 11.764 10.836 10.0179292 8.649 7.562 6.687 6.312 19.660 17.658 15.937 14.451 13.163 12.042 11.051 10.2019.442 8.772 7.645 6.7436.359 20.456 18.292 16.444 14.857 13.489 12 303 11.272 10.371 9.580 8.883 7.718 6.792 6.399 21.243 18.914 16.936 15.247 13.799 12.550 11.469 10.529 9.707 8.985 7.784 6.835 6.434 22.023 19.523 17.413 15.622 14.094 12783 11.654 10.675 9.823 9.077 7.843 6.873 6.464 22.795 20.121 17 877 15.983 14.375 13.003 11.826 10.8109.929 9.161 7.896 6.906 6.491 23.560 20.707 18.327 16.330 14.643 13211 11.987 10.935 10.027 9.237 7.943 6.935 6,514 24.316 21.281 18.764 16,663 14.898 13.406 12.137 11.051 10.116 9.307 7.984 6.961 6.534 25.066 21.844 19.188 16.984 15.141 13.591 12278 11.158 10.198 370 8.022 6.983 6.551 25.808 22.396 19.600 17.292 15.372 13.765 12.409 11.258 10.2749.427 8.055 7.003 6.566 32 835 27.355 23. 115 19.793 17.159 15.046 13.332 11.925 10.7579.779 8.244 7.105 6.642 39.195 3142425.730 21.482 18.256 15.762 13.801 12 233 10.9629.915 8.304 7.133 6.661 16% 18% 0.862 0.847 1.6051566 2 246 2.174 2.798 2.690 3.274 3.127 3.685 3.498 4.039 3.812 4.344 4.078 4.607 4303 4.833 4.494 5.029 4.656 5.197 4.793 5.342 4.910 5.468 5,008 5.575 5.092 5.669 5.162 5.749 5.222 5.818 5273 5.877 5.316 5.929 5.353 5.973 5.384 6.011 5.410 6.044 5.432 6.073 5.451 6.097 5.467 6.118 5.480 6.136 5.492 6.152 5.502 6.166 5.510 6.177 5.517 6.233 5.548 6.246 5.554 4.327 4439 4.533 4.611 4.675 4.730 4.775 4.812 4.844 4.870 Index of 16 17 18 19 20 mpany mallers 000 for Lechod an is ex he estir 200,000 return pting me mpany's 21 22 23 24 25 4.891 4.909 4.925 4.937 4.948 26 27 28 29 30 4.956 4.964 4.970 4.975 4.979 4.997 40 4.999 50 om any Print Done CHOCK Answer Clear All ing Periods 8% of $1 table.) 1 Computer 2 3 4 5 ayback for bo 6 8 9 10 nfo 11 12 13 14 15 2.759 1% 2% 3% 4% 1.010 1.020 1.030 1.040 1.020 1.040 1.061 1.082 1.030 1,061 1.093 1.125 1.041 1.082 1.126 1.170 1.051 1.104 1.159 1.217 1.062 1.126 1.194 1.265 1.072 1.149 1.230 1.316 1.083 1.172 1 267 1.369 1.094 1.195 1.305 1.423 1.105 1219 1,344 1.480 1.116 1.243 1,384 1.539 1.127 1.268 1.426 1601 1.138 1294 1469 1.665 1.149 1319 1.513 1.732 1.161 1.346 1.558 1.801 1.173 1.373 1.605 1.873 1.184 1.400 1.653 1.948 1.196 1428 1.702 2.026 1 208 1457 1.754 2. 107 1220 1486 1.806 2.191 1.232 1516 1.860 2.279 1.245 1546 1.916 2.370 1.257 1.577 1.974 2.465 1.270 1.608 2033 2.563 1.282 1.841 2.094 2.666 1.295 1,673 2.157 2.772 1.308 1.707 2.221 2.883 1.321 1.741 2.288 2.999 1.335 1.776 2.357 3.119 1.348 1.811 2427 3.243 1.489 2208 3262 4,801 1.6452692 4.384 7.107 Future Value 31 5% 6% 7% 1.050 1.060 1,070 1.080 1.103 1.124 1.145 1.166 1.158 1.191 1.225 1.260 1.216 1.262 1.311 1.360 1276 1.338 1.403 1.469 1.340 1.419 1.501 1.587 1407 1.504 1.606 1.714 1.477 1.594 1.718 1.851 1.551 1.689 1.838 1.999 1.629 1.791 1.967 2.159 1.710 1.898 2.105 2.332 1.796 2012 2.252 2518 1.886 2.133 2.410 2.720 1.980 2261 2.579 2.937 2.079 2.397 3.172 2.183 2.540 2.952 3.426 2292 2693 3.159 3.700 2.407 2.854 3.380 3.996 2.527 3.026 3.617 4316 2653 3.207 3.8704661 2.786 3.400 4.141 5.034 2.925 3,604 4.430 5.437 3.0723.820 4.741 5.871 3.225 4,049 5.072 6.341 3.386 4.292 5.427 6.848 3.556 4.549 5,8077.396 3.733 4,822 6.214 7.988 3.920 5.112 6.649 8.627 4.116 5.418 7.114 9.317 4.322 5.743 7.612 10.06 7.040 10.29 14.97 21.72 11.47 18.42 29.46 46.90 9% 10% 12% 1.090 1.100 1,120 1.188 1210 1.254 1 295 1,331 1.405 1.412 1.464 1.574 1539 1611 1.762 1.677 1.772 1.974 1.828 1.949 2211 1.993 2.144 2.476 2.172 2.3582.773 2367 2.594 3.106 2.580 2.853 3.479 2813 3.138 3.896 3,066 3.452 4.363 3.342 3.798 4.887 3.642 4.177 5.474 3.970 4.595 6.130 4328 5,054 6.866 4.717 5.560 7.690 5.142 6.116 8.613 5,604 6.727 9.646 6.109 7400 10.80 6.659 8.140 12.10 7 258 8.954 13.55 7.911 9.850 15.18 8.623 10.83 17.00 9.399 11.92 19.04 10.25 13.11 21.32 11.17 14.42 23.88 12.17 15.86 26.75 13.27 17.45 29.96 31.41 45.26 93.05 74.36 117.4 289.0 14% 15% 1.140 1.150 1.300 1.323 1.482 1.521 1.689 1.749 1.925 2011 2.195 2313 2.502 2.660 2.853 3.059 3.252 3.518 3.707 4.046 4.226 4.652 4.818 5.350 5.492 6.153 6.261 7,076 7.138 8.137 8.137 9.358 9.278 10.76 10.58 12.38 12.06 14.23 13.74 16.37 15.67 18.82 17.86 21.64 20.38 24.89 23.21 28.63 28.46 32.92 30.17 37.86 34.39 43.54 39 20 50.07 44.69 57.58 50.95 66.21 188.9 2679 700.2 1,084 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 40 50 bfitability index of the any is conside er shops at a for 10 years chos Compar s expected to estimated usd 3.000. Leches um of 10% jital budgeting metho se? Why? ith the company's son to view al ty of $1 table.) ements of $1 table.) Periods 1 2 3 1. Computer 4 ayback for bo 5 6 7 8 10 Info 11 12 13 14 15 Future Value of Ordinary Annuity of $1 2% 3% 4% 5% 6% 7% 8% 9% 10% 12% 1.000 1.000 1.000 1.000 1.000 1.09 1.000 1.000 1.000 1.000 2.020 2.030 2040 2.050 2.060 2.070 2.080 2.090 2.100 2120 3.060 3.091 3.122 3.153 3.184 3215 3246 3.278 3.310 3.374 4.122 4.184 4.246 4.310 4.375 4.440 4.506 4.573 4.641 4.779 5.204 5 309 5.416 5.526 5.637 5.751 5867 5.985 6.105 6353 6.308 6.468 6.633 6.802 6.975 7.153 7.336 7523 7.716 8.115 7434 7,662 7.898 8.142 8.394 8.654 8.923 9 200 9.487 10.09 8.583 8.892 9.214 9.549 9.897 10.260 10.64 11.03 11.44 12.30 9.755 10.16 10.58 11.03 11.49 1199 12.49 13.02 13.58 14.78 10.95 11.46 12.01 12.58 13.18 13.82 14.49 15.19 15.94 17.55 12.17 12.81 13.49 14.21 14.97 15.78 16.65 17.56 18.53 20.65 13.41 14.19 15.03 15.92 16.87 17.89 18.98 20.14 21.38 24.13 14.68 15.62 16.63 17.71 18.88 20.14 21.50 2295 24.52 28.03 15.97 17.09 18.29 19.60 21.02 22 55 24.21 2602 27.98 32.39 17.29 1860 20.02 21.58 23 28 25.13 27.15 29.36 31.77 37.28 18.64 20.16 21.82 23.66 25.67 27.89 30,32 3300 35.95 42.75 20.01 21.76 23.70 25.BA 2821 30.84 33.75 36 97 40.54 48.88 21.41 23.41 25.65 28.13 30.91 34.00 37.45 41.30 45.60 55.75 22.84 25.12 27.67 30.54 3376 37.38 41.45 46 02 51.16 63.44 24.30 26.87 29.7833.07 36.79 41.00 45.78 51.16 57.28 7205 25.78 28 68 31.97 35.72 39.994487 50.42 56.76 64.00 81.70 27.30 30.54 34.25 38.51 4339 49.01 55.46 62.87 71.40 92.50 28.85 3245 36.62 41.43 47.00 53.4460.89 69.53 79.54 1046 30.42 344339,08 50.82 58.18 7679 88.50 1182 32.03 36.46 41.65 47.73 54.86 63.25 73.11 84.70 98.35 1333 33.67 3855 44.31 51.11 59.16 68.68 79.95 93.32 109.2 1503 35.34 407147.08 54.67 63.71 74.48 102.7 121.1 1694 37.05 4293 49.97 58.40 68.53 80.70 95.34 113.0 1342 190.7 38.79 4522 52.97 62.32 73.64 87.36 104.0 124.1 148.6 214,6 40.57 47.58 56.08 66.44 79.06 94.46 113.3 136.3 164.5 241.3 60.40 75.40 95.03 120.8 154.8 1996 337.9442.6 7671 84.58 112.8 152.7 209.3 290.3 406.5 5738 815.1 1,164 2,400 1% 1.000 2010 3.030 4.060 5.101 6.152 7214 8.286 9.369 10.46 11.57 12.68 13.81 14.95 16.10 17.26 18.43 19.61 20.81 22.02 23 24 24.47 25.72 26.97 28.24 29.53 30.82 32.13 33.45 34.78 48.89 84.46 any is conside ler shops at a O for 10 years ches Compar is expected to estimated us 0,000. Leches Curn of 10% 16 17 18 19 20 21 22 23 24 25 fitability index of the 14% 15% 1.000 1.000 2.140 2.150 3.440 3.473 4.921 4.993 6.610 6.742 8.536 8.754 10.73 11.07 13 23 13.73 16.09 16.79 19 34 20.30 23.04 24.35 27 27 29.00 32.09 34 35 37.58 40.50 43.84 47.58 50.98 55.72 59.12 65.08 68.39 75.84 78.97 88.21 91.02 1024 104.8 118.8 120.4 1376 138.3 159.3 158.7 1842 181.9 212.8 208.3 2457 238.5 272.9 3271 312.1 3772 356.8 434.7 1,342 1,779 4,995 7.218 ital budgeting metho se? Why? ith the company's 4450 66.76 8735 283.6 26 22 28 29 30 40 50 259.1 en hann remer Help Me Solve This Question Help 1. Cor Leches Company operates a chain of sandwich shops. (Click the icon to view additional information.) payba Read the requirements. (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.) ying aller she Info After identifying potential capital investments, managers must analyze the investments using one or more capital budgeting methods. Four popular methods of analyzing potential capital investments include: 1. Payback 2. Accounting rate of return (ARR) Dany is 3. Net present value (NPV) 4. Internal rate of return (IRR) 0 for 1 Requirement 1. Compute the payback, the ARR, the NPV, and the profitability index of these two plans. echos is expe Payback is a capital investment analysis method that measures the length of time it takes to recover, in net cash inflows, the cost of the estime initial investment. All else being equal, the shorter the payback period, the more attractive the asset. When net cash inflows are expected 00,000 to be equal each year, managers compute the payback by dividing the amount invested by the expected annual net cash inflow. Use the amounts given in the problem to calculate the payback for both plans. (Round your answers to one decimal place, X.X.) Amount invested | Expected annual net cash inflow Payback 8,500,000 1,625,000 $ 8,000,000 1,120,000 geti y? som eturn of Plan A $ 5.2 years 7.1 years Plan B index of these Calculate the ARR (accounting rate of return) for both plans, More Info Companies are in business to eam profits. The (ARR) is a capital investment analysis method that measures the profitability of an investment by dividing the average annual operating income by the average amount invested Generally accepted accounting principles (GAAP) are based on accrual accounting, but capital budgeting focuses on cash flows. The he company is ght smaller and desirability of a capital asset depends on its ability to generate net cash infows--that is cash inflows in excess of cash outflows-over 560,000 for the asset's useful life. Recall that operating income based on accrual accounting contains noncash expenses, such as depreciation expense and bad debts expense. These expenses decrease operating income but do not require a cash outlay. The capital investment's lan B, Leches net cash inflows, therefore, will differ from its operating income of the four popular capital budgeting methods, only the accounting rate this plan is explof roturn method uses accrual-based accounting income. The other three methods use the investment's projected net cash inflows." bars, the estim is $1,200,000 Begin by calculating the expected average annual operating income for each plan. To determine this amount, we must subtract the nnual return of non-cash annual depreciation expense from the expected annual net cash inflow for each plan Expected annual net cash inflow Annual depreciation expense = Average annual operating income Plan A $ 1,625,000 $ 850,000 = $ 775,000 Plan B $ 1,120.000 $ 670,000 $ 450,000 goting methods y? company's Complete the Otorine the index of these More Info divide the sum of the amount invested and the investment's estimated residual value by two. (Round your answers to the nearest tenth percent. XX%) Average annual operating income / Average amount invested ARR The company is Plan A $ 775,000 4.250,000 18.2% eight smaller she s Plan B 450.000 4,650,000 $1,550,000 for 1 Plan B, Leches A dollar received today is worth more than a dollar to be received in the future because you can invest today's dollar and earn additional This plan is expo interest so you'll have more cash in the future. The fact that invested cash earns income over time is called the time value of money. This years, the estim concept explains why we would prefer to receive cash sooner rather than later. The time value of money means that the timing of capital Bis $1.200,000 investments' net cash inflows is important. Two methods of capital investment analysis incorporate the time value of money the net annual return of present value (NPV) and internal rate of retur (IRR) Caciulate the NPV (net present value) of each plan To decide how attractive each investment is, we find its NPV NPV is a capital investment analysis method that measures the net difference between the present value of the investment's net cash inflows and the investment's cost (cash outflows). We discount the net cash inflows using the company's minimum required rate of return. This rate is called the discount rate because it is the interest rate used peting methods? y? Sompany's Index of these To calculate the net present value of Plan A we must subtract the present value of the cash outflow for the investment (which is already More Info stated in present value terms) from the total PV of cash inflows (in this case, just the present value of the annuity from the annual cash inflows), Be sure to use the Present Value of Ordinary Annuity of $1 factor table provided to determine the annuity PV factor that coincides with a 10% discount rate and 10 periods. Note that there is no expected residual value for Plan A, so the present value of the residual value will be so for this plan. The zeros related to the residual value for Plan A have been entered into the table for you. (Enter The company is any factor amounts to three decimal places, X.XXX, Use parentheses or a minus sign for a negative net present value.) eight smaller she $1,550,000 for 1 Plan A: Net Cash Annuity PV Factor PV Factor Present Plan B, Leches Years Inflow (-10%, n=10) (10%, 10) Value This plan is expe years, the estime 1 - 10 Present value of annuity $ 1,625,000 6.145 $ 9.985,625 Bis $1,200,000 10 0 Present value of residual value 0 0 annual return of Total PV of cash inflows 9,985,625 0 Initial Investment (8,500,000) Net present value of Plan A $ 1.485,625 geting methods? y? pompany's index of these Calculate the NPV of Plan B 1 More Info The computation of the NPV of Plan B must also account for the present value of the lump-sum residual value at the end of the 10 years. The annuity PV factor, which will be the same as the one you identified in your NPV computation for Plan B has been entered for you. You will have to determine the PV factor needed to determine the PV of the residual value using the Present Value of $1 factor table provided. Go ahead and complete the table below to determine the NPV of Plan B. (Enter any factor amounts to three decimal places The company is x.xxx. Use parentheses or a minus sign for a negative net present value) eight smaller she $1.550,000 for Plan : Net Cash Annuity PV Factor PV Factor Present Plan B. Laches This plan is exp Years Inflow (i=10%, n=10) (1=10%, n=10) Value years, the estime 1 - 10 Present value of annuity $ 1,120.000 6145 $ 6,882,400 Bis $1,200,000 annual return of Present value of residual value 0.386 501,800 1,300,000 Total PV of cash intows 7,384,200 0 Initial Investment (8,000,000) $ (615.800) Net present value of Plan B geting methods? y? company's 10 y index of these Calculate the profitability index of these two plans i More Info What happens if a company has more than one investment option and more than one option appears to be an attractive investment? Assuming the company can only invest in one project at this time, which one should it choose? The company may want to compute the profitability index (also known as the present value index) to assist in the decision. The profitability Index computes the number of dollars The company is returned for every dollar invested, with all calculations performed in prosent value dollars. The profitability index is computed by dividing right smaler she the present value of net cash inflows by the initial investment. Note that you have already determined the present value of cash inflows $1,550,000 for 1 when calculating the NPV of each plan. Go ahead and calculate the profitability index for each pian (Round to two decimal places XXX.) Plan B. Leches This plan is op Present value of net cash inflows Initial investment - Profitability index years, the estime Plan A $ 9,985.625 8,500,000 1.17 B is $1.200.000 annual return of Plan B $ 7.384.200 IS 8,000,000 0.92 Requirement 2. What are the strengths and weaknesses of these capital budgeting methods? Payback and accounting rate of retum are fairly quick and easy, and they work well for capital investments that have a relatively short life span, such as computer equipment and software that may have a useful life of only three to five years. Payback and accounting rate of return are also used to screen potential investments from those that are less desirable. Payback provides management with valuable information on how fast the cash invested wil he renner! The ninnatenfrahum shows the effect of the investment in the geting methods? ly? sompany's index of these Requirement 3. Which expansion plan should Lajos Company choose? Why? More Info Consider the capital budgeting models we have used to compare the two plans. We know that the shorter the payback period, the more attractive the asset, with all else being equal. The ARR measures the average rate of return over the asset's entire life. It focuses on the operating income an asset can earn Generally speaking, the plan with the higher ARR would be more attractive. NPV is the difference company is between the present value of the investment's net cash inflows and the investment's cost. The plan with the higher NPV would be more mt smaller she attractive. And finally, the higher the profitability index, which computes the number of dollars retumed for every dollar invested in 550,000 for 1 present value dollars), the more attractive the investment Review the calculations made in Requirement 1 to determine which plan in B. Laches Lajos Company should choose s plan is expe Requirement 4. Estimate Plan A's IRR. How does the IRR compare with the company's required rate of retur? 3 $1,200,000 When NPV is calculated, the PV factor is selected using the company's required rate of return. If the NPV is positive, then you know the nual return of actual rate of retum is greater than the required rate of return and it is an acceptable project. However, you do not know the actual rate of return, only that it is greater than the required rate. If the NPV is zero, then you know the actuallate is equal to the required rate. The actual rate of return is called the internal rate of return. In other words, the IRR is the interest rate that makes the initial cost of the investment equal to the present value of the investment's net cash inflows, which means the NPV is zero. The higher the IRR, the more desirable the project. geting methods y? Company's Index of these Plan A, which has an initial investment of $8,500,000, is anticipated to have 10 equal cash inflows of $1,625,000. We compute the IRR of More Info an investment with equal periodic cash flows (annuity) by taking the following steps: 1. The IRR is the interest rate that makes the cost of the investment equal to the present value of the investment's net cash inflows, so we set up the following equation: The company is Initial investment = PV of net cash inflows eight smaller she $1,550,000 for 1 Initial investment Amount of cash inflow X. Annuity PV factor (-?given) Plan B. Leches 2. Next, we plug in the information we do know-the investment cost, the equal annual net cash infows, and the number of periods: This plan is expe years, the estime $8,500,000 = $1,625,000 x Annuity PV factor (i = ?, n = 10) B is $1,200,000 3. We then rearrange the equation and solve for the Annuity PV factor (/7, n. 10) annual return of Annuity PV factor (/7, 10) Initial investment / Amount of cash inflow - $8,500,000 $1,625.000 5.231 Round to three decimal places, XXXX) geting methods? y? Jompany's y? Company's Plan B, Leches This plan is expe years, the estime Bis $1,200,000 annual return of 4. Finally, we find the interest rate for interest rate range) that corresponds to this Annuity PV factor. Review the Present Value of Ordinary Annuity of 1 factor table Scan the row corresponding to the plan's expected life of 10 periods. Choose the percentage range that the number from Step 3-5.231-falls between The IRR (internal rate of return) of Plan Ais between 12%-14% How does the IRR compare with the company's required rate of rotum? Note that the IRR of 12%-14% exceeds the company's hurdle rate of 10%. This makes sense since the NPV of the project, using the 10% hurdle rate is a positive amount-$1,485,625 Question Help P26-31A (similar to) Leches Company operates a chain of sandwich shops. (Click the icon to view additional information) Read the requirements Click the icon to view Present Value of $1 table) (Click the con 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) 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. XX) Plan A 1 Payback years years Plan B Requirements 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 $1,550,000 for 10 years, with zero residual value at the end of 10 years. Under Plan B, Leches Company would open three larger shops at a cost of $8.150.000 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 Bis $1,200,000. Leches Company uses straight-line depreciation and requires an annual return of 10% 1. Compute the payback, the ARR, the NPV, and the proftability index of these two plans 2. What are the strengths and weaknesses of these capital budgeting methods? 3. Which expansion plan should Leches Company choose? Why? 4. Estimate Plan A'SIRR How does the IRR compare with the company's required rate of return? Print Dono Print Done Hererence lcon able.) uirem ble.) Periods 1 2 at 1. 4 5 payb 0507 6 7 9 10 0287 re Info 11 12 13 14 15 Present Value of $1 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 12% 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909 0.893 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826 0.797 0.971 0.942 0.915 0.889 0.864 0 840 0.816 0.794 0.772 0.751 0.712 0.951 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683 0.636 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621 0.567 0.942 0.888 0837 0.790 0.746 0.705 0 686 0.630 0.596 0.564 0.933 0.871 0813 0.750 0.711 0.665 0.623 0.583 0.547 0.513 0.452 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467 0.404 0.914 0.837 0.766 0.703 0645 0.592 0.544 0.500 0.460 0.424 0.361 0.905 0.820 0.744 0676 0.614 0.558 0.508 0.463 0422 0.386 0.322 0.896 0.804 0.722 0.650 0.585 0527 0475 0.429 0.388 0.350 0.887 0.788 0701 0.625 0.557 0497 0.444 0397 0.356 0.319 0.257 0879 0.773 0.601 0.530 0.469 0.415 0.368 0.326 0.290 0.229 0.870 0.758 0.661 0577 0.505 0442 0388 0.340 0.299 0.263 0205 0.861 0.743 0.642 0.555 0.481 0417 0.362 0.315 0.275 0.239 0.183 0.853 0.728 0.623 0.534 0.458 0394 0339 0.292 0252 0218 0.163 0.844 0.714 0.605 0.513 0436 0371 0.317 0.270 0231 0.198 0.146 0.836 0.700 0.587 0.494 0.4160350 0.296 0250 0212 0.180 0.130 0828 0.686 0.570 0.475 0.331 0.277 0.232 0.194 0.164 0.115 0.820 0.673 0.5540456 0.377 0.312 0.258 0.215 0.178 0.149 0.104 0.811 0.660 0.538 0.439 0.359 0.294 0242 0.199 0.1640.135 0.093 0.803 0.647 0.522 0.422 0.342 0.278 0226 0.1840.150 0.123 0.083 0.795 0.634 0507 0.406 0.326 0.262 0.211 0.170 0.138 0.112 0.074 0788 0.622 0.492 0.390 0.310 0247 0.197 0.158 0.126 0.102 0.066 0.780 0.610 0.478 0.375 0.296 0.233 0.184 0.146 0.116 0.092 0.059 0.772 0.598 0.464 0.361 0.281 0.172 0.135 0.106 0.084 0.053 0.764 0.586 0.450 0.347 0.268 0.207 0.161 0.125 0.098 0.076 0.047 0.757 0.574 0437 0.333 0.255 0.196 0.150 0.116 0.090 0.069 0.042 0.7490.563 0.424 0.321 0.243 0.185 0.141 0.107 0.082 0.063 0.037 0.742 0.552 0.412 0.308 0.231 0.174 0.131 0.099 0.075 0.057 0.033 0.672 0453 0.307 0.200 0.142 0.097 0.067 0.046 0.032 0.022 0.011 0.608 0.372 0.228 0.141 0.087 0.054 0.034 0.021 0.013 0.009 0.003 14% 15% 16% 18% 20% 0.877 0.870 0.862 0.847 0.833 0.789 0.756 0.743 0.718 0.694 0.675 0.658 0.641 0609 0.579 0.592 0.572 0.552 0.516 0.482 0.519 0.497 0.476 0.437 0.402 0.456 0.432 0.410 0.370 0.335 0.400 0.376 0.354 0.3140.279 0.351 0.327 0.305 0.266 0.233 0.30B 0.284 0.263 0.225 0.194 0.270 0.247 0227 0.191 0.162 0237 0215 0.195 0.162 0.135 0 208 0.187 0.168 0.137 0.112 0.182 0.163 0.145 0.116 0.093 0.160 0.141 0.125 0.099 0.078 0.140 0.123 0.108 0.084 0.065 0.123 0.107 0.093 0.071 0.054 0.108 0.093 0.080 0.060 0.045 0.095 0.081 0.069 0.051 0.038 0.083 0.060 0.043 0.031 0.073 0.061 0.051 0.037 0.026 0.064 0.053 0.044 0.031 0.022 0056 0.046 0.038 0.026 0.018 0.049 0.040 0.033 0.022 0.015 0043 0.035 0.028 0.019 0.013 0.038 0.030 0.024 0.016 0.010 0033 0.026 0.021 0.014 0.009 0.029 0.023 0.018 0.011 0.007 0.026 0.020 0.016 0.010 0.006 0.022 0.017 0.014 0008 0.005 0.020 0.015 0.012 0.007 0.004 0.005 0.0040.003 0.001 0.001 0.001 0.001 0.001 Index of thes 16 17 18 19 20 0.396 pany mallers 000 for Leches en is ex he estir 200,000 return 0.070 pting method 2 mpany's 21 22 23 24 25 0220 26 27 28 29 30 40 50 many Print Done Clear All Check Answer ng icon able.) 7 uirem ble.) 14% Periods 1 20% 0.833 1.528 2108 2589 2991 2 3 4 5 t 1. c payb 6 7 8 9 10 3.326 3.605 3.837 4.031 4.192 re Info 11 12 13 14 15 Present Value of Ordinary Annuity of $1 1% 2% 3% 4% 5% 7% 8% 9% 10% 12% 15% 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909 0.893 0.877 0870 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736 1.690 1.647 1.626 2.941 2.884 2.829 2775 2.723 2.673 2.624 2577 2.531 2.487 2.402 2322 2283 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170 3.037 2914 2.855 4853 4.713 4.580 4452 4.329 4.212 4.100 3.993 3.890 3.791 3.605 3433 3.352 5.795 5,601 5.417 5.242 5,076 4.917 4.767 4.623 4.486 4.355 4.111 3.889 3.784 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868 4.564 4288 4.160 7.652 7325 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.335 4.968 4.639 4487 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.995 5.759 5.328 4.946 4.772 9.471 8.983 8.530 8.111 7.722 7.360 7.024 6.710 6.418 6.145 5.650 5.216 5.019 10.368 9.787 9.253 8.780 8.306 7.887 7.499 7.139 6.805 6.495 5.938 5.453 5.234 11.255 10.575 9.954 9.385 8.863 8384 7.943 7.536 7.161 6.814 6.194 5660 5421 12.134 11.348 10.635 9.986 9.394 8.853 8.358 7.904 7.487 7.103 6.424 5.842 5.583 13.004 12.106 11.296 10.563 9.899 9 295 8.745 8 244 7.786 7.357 6.628 6.002 5.724 13 865 12.849 11.938 11.118 10.380 9.712 9.108 8.559 8.061 7.606 6.811 6.142 5.847 14.718 13.578 12.561 11.652 10.838 10.106 9.447 8.851 8.313 7.824 6.974 6.265 5.954 15.562 14 292 13.166 12. 166 11 274 10.477 9.763 9.122 8.544 8.022 7.120 6.373 6.047 16.398 14.992 13.754 12.659 11.690 10.828 10.059 9.372 8.756 8.201 7.250 6.467 6.128 17.226 15.678 14.32413.13412.085 11.158 10.336 9.604 8.950 8.365 7.366 6.550 6.198 18.046 16.351 14.877 13.590 12.462 11.470 10.5949.818 9.129 8.514 7.469 6.623 6.259 18.857 17.011 15.415 14.029 12.821 11.764 10.836 10.0179292 8.649 7.562 6.687 6.312 19.660 17.658 15.937 14.451 13.163 12.042 11.051 10.2019.442 8.772 7.645 6.7436.359 20.456 18.292 16.444 14.857 13.489 12 303 11.272 10.371 9.580 8.883 7.718 6.792 6.399 21.243 18.914 16.936 15.247 13.799 12.550 11.469 10.529 9.707 8.985 7.784 6.835 6.434 22.023 19.523 17.413 15.622 14.094 12783 11.654 10.675 9.823 9.077 7.843 6.873 6.464 22.795 20.121 17 877 15.983 14.375 13.003 11.826 10.8109.929 9.161 7.896 6.906 6.491 23.560 20.707 18.327 16.330 14.643 13211 11.987 10.935 10.027 9.237 7.943 6.935 6,514 24.316 21.281 18.764 16,663 14.898 13.406 12.137 11.051 10.116 9.307 7.984 6.961 6.534 25.066 21.844 19.188 16.984 15.141 13.591 12278 11.158 10.198 370 8.022 6.983 6.551 25.808 22.396 19.600 17.292 15.372 13.765 12.409 11.258 10.2749.427 8.055 7.003 6.566 32 835 27.355 23. 115 19.793 17.159 15.046 13.332 11.925 10.7579.779 8.244 7.105 6.642 39.195 3142425.730 21.482 18.256 15.762 13.801 12 233 10.9629.915 8.304 7.133 6.661 16% 18% 0.862 0.847 1.6051566 2 246 2.174 2.798 2.690 3.274 3.127 3.685 3.498 4.039 3.812 4.344 4.078 4.607 4303 4.833 4.494 5.029 4.656 5.197 4.793 5.342 4.910 5.468 5,008 5.575 5.092 5.669 5.162 5.749 5.222 5.818 5273 5.877 5.316 5.929 5.353 5.973 5.384 6.011 5.410 6.044 5.432 6.073 5.451 6.097 5.467 6.118 5.480 6.136 5.492 6.152 5.502 6.166 5.510 6.177 5.517 6.233 5.548 6.246 5.554 4.327 4439 4.533 4.611 4.675 4.730 4.775 4.812 4.844 4.870 Index of 16 17 18 19 20 mpany mallers 000 for Lechod an is ex he estir 200,000 return pting me mpany's 21 22 23 24 25 4.891 4.909 4.925 4.937 4.948 26 27 28 29 30 4.956 4.964 4.970 4.975 4.979 4.997 40 4.999 50 om any Print Done CHOCK Answer Clear All ing Periods 8% of $1 table.) 1 Computer 2 3 4 5 ayback for bo 6 8 9 10 nfo 11 12 13 14 15 2.759 1% 2% 3% 4% 1.010 1.020 1.030 1.040 1.020 1.040 1.061 1.082 1.030 1,061 1.093 1.125 1.041 1.082 1.126 1.170 1.051 1.104 1.159 1.217 1.062 1.126 1.194 1.265 1.072 1.149 1.230 1.316 1.083 1.172 1 267 1.369 1.094 1.195 1.305 1.423 1.105 1219 1,344 1.480 1.116 1.243 1,384 1.539 1.127 1.268 1.426 1601 1.138 1294 1469 1.665 1.149 1319 1.513 1.732 1.161 1.346 1.558 1.801 1.173 1.373 1.605 1.873 1.184 1.400 1.653 1.948 1.196 1428 1.702 2.026 1 208 1457 1.754 2. 107 1220 1486 1.806 2.191 1.232 1516 1.860 2.279 1.245 1546 1.916 2.370 1.257 1.577 1.974 2.465 1.270 1.608 2033 2.563 1.282 1.841 2.094 2.666 1.295 1,673 2.157 2.772 1.308 1.707 2.221 2.883 1.321 1.741 2.288 2.999 1.335 1.776 2.357 3.119 1.348 1.811 2427 3.243 1.489 2208 3262 4,801 1.6452692 4.384 7.107 Future Value 31 5% 6% 7% 1.050 1.060 1,070 1.080 1.103 1.124 1.145 1.166 1.158 1.191 1.225 1.260 1.216 1.262 1.311 1.360 1276 1.338 1.403 1.469 1.340 1.419 1.501 1.587 1407 1.504 1.606 1.714 1.477 1.594 1.718 1.851 1.551 1.689 1.838 1.999 1.629 1.791 1.967 2.159 1.710 1.898 2.105 2.332 1.796 2012 2.252 2518 1.886 2.133 2.410 2.720 1.980 2261 2.579 2.937 2.079 2.397 3.172 2.183 2.540 2.952 3.426 2292 2693 3.159 3.700 2.407 2.854 3.380 3.996 2.527 3.026 3.617 4316 2653 3.207 3.8704661 2.786 3.400 4.141 5.034 2.925 3,604 4.430 5.437 3.0723.820 4.741 5.871 3.225 4,049 5.072 6.341 3.386 4.292 5.427 6.848 3.556 4.549 5,8077.396 3.733 4,822 6.214 7.988 3.920 5.112 6.649 8.627 4.116 5.418 7.114 9.317 4.322 5.743 7.612 10.06 7.040 10.29 14.97 21.72 11.47 18.42 29.46 46.90 9% 10% 12% 1.090 1.100 1,120 1.188 1210 1.254 1 295 1,331 1.405 1.412 1.464 1.574 1539 1611 1.762 1.677 1.772 1.974 1.828 1.949 2211 1.993 2.144 2.476 2.172 2.3582.773 2367 2.594 3.106 2.580 2.853 3.479 2813 3.138 3.896 3,066 3.452 4.363 3.342 3.798 4.887 3.642 4.177 5.474 3.970 4.595 6.130 4328 5,054 6.866 4.717 5.560 7.690 5.142 6.116 8.613 5,604 6.727 9.646 6.109 7400 10.80 6.659 8.140 12.10 7 258 8.954 13.55 7.911 9.850 15.18 8.623 10.83 17.00 9.399 11.92 19.04 10.25 13.11 21.32 11.17 14.42 23.88 12.17 15.86 26.75 13.27 17.45 29.96 31.41 45.26 93.05 74.36 117.4 289.0 14% 15% 1.140 1.150 1.300 1.323 1.482 1.521 1.689 1.749 1.925 2011 2.195 2313 2.502 2.660 2.853 3.059 3.252 3.518 3.707 4.046 4.226 4.652 4.818 5.350 5.492 6.153 6.261 7,076 7.138 8.137 8.137 9.358 9.278 10.76 10.58 12.38 12.06 14.23 13.74 16.37 15.67 18.82 17.86 21.64 20.38 24.89 23.21 28.63 28.46 32.92 30.17 37.86 34.39 43.54 39 20 50.07 44.69 57.58 50.95 66.21 188.9 2679 700.2 1,084 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 40 50 bfitability index of the any is conside er shops at a for 10 years chos Compar s expected to estimated usd 3.000. Leches um of 10% jital budgeting metho se? Why? ith the company's son to view al ty of $1 table.) ements of $1 table.) Periods 1 2 3 1. Computer 4 ayback for bo 5 6 7 8 10 Info 11 12 13 14 15 Future Value of Ordinary Annuity of $1 2% 3% 4% 5% 6% 7% 8% 9% 10% 12% 1.000 1.000 1.000 1.000 1.000 1.09 1.000 1.000 1.000 1.000 2.020 2.030 2040 2.050 2.060 2.070 2.080 2.090 2.100 2120 3.060 3.091 3.122 3.153 3.184 3215 3246 3.278 3.310 3.374 4.122 4.184 4.246 4.310 4.375 4.440 4.506 4.573 4.641 4.779 5.204 5 309 5.416 5.526 5.637 5.751 5867 5.985 6.105 6353 6.308 6.468 6.633 6.802 6.975 7.153 7.336 7523 7.716 8.115 7434 7,662 7.898 8.142 8.394 8.654 8.923 9 200 9.487 10.09 8.583 8.892 9.214 9.549 9.897 10.260 10.64 11.03 11.44 12.30 9.755 10.16 10.58 11.03 11.49 1199 12.49 13.02 13.58 14.78 10.95 11.46 12.01 12.58 13.18 13.82 14.49 15.19 15.94 17.55 12.17 12.81 13.49 14.21 14.97 15.78 16.65 17.56 18.53 20.65 13.41 14.19 15.03 15.92 16.87 17.89 18.98 20.14 21.38 24.13 14.68 15.62 16.63 17.71 18.88 20.14 21.50 2295 24.52 28.03 15.97 17.09 18.29 19.60 21.02 22 55 24.21 2602 27.98 32.39 17.29 1860 20.02 21.58 23 28 25.13 27.15 29.36 31.77 37.28 18.64 20.16 21.82 23.66 25.67 27.89 30,32 3300 35.95 42.75 20.01 21.76 23.70 25.BA 2821 30.84 33.75 36 97 40.54 48.88 21.41 23.41 25.65 28.13 30.91 34.00 37.45 41.30 45.60 55.75 22.84 25.12 27.67 30.54 3376 37.38 41.45 46 02 51.16 63.44 24.30 26.87 29.7833.07 36.79 41.00 45.78 51.16 57.28 7205 25.78 28 68 31.97 35.72 39.994487 50.42 56.76 64.00 81.70 27.30 30.54 34.25 38.51 4339 49.01 55.46 62.87 71.40 92.50 28.85 3245 36.62 41.43 47.00 53.4460.89 69.53 79.54 1046 30.42 344339,08 50.82 58.18 7679 88.50 1182 32.03 36.46 41.65 47.73 54.86 63.25 73.11 84.70 98.35 1333 33.67 3855 44.31 51.11 59.16 68.68 79.95 93.32 109.2 1503 35.34 407147.08 54.67 63.71 74.48 102.7 121.1 1694 37.05 4293 49.97 58.40 68.53 80.70 95.34 113.0 1342 190.7 38.79 4522 52.97 62.32 73.64 87.36 104.0 124.1 148.6 214,6 40.57 47.58 56.08 66.44 79.06 94.46 113.3 136.3 164.5 241.3 60.40 75.40 95.03 120.8 154.8 1996 337.9442.6 7671 84.58 112.8 152.7 209.3 290.3 406.5 5738 815.1 1,164 2,400 1% 1.000 2010 3.030 4.060 5.101 6.152 7214 8.286 9.369 10.46 11.57 12.68 13.81 14.95 16.10 17.26 18.43 19.61 20.81 22.02 23 24 24.47 25.72 26.97 28.24 29.53 30.82 32.13 33.45 34.78 48.89 84.46 any is conside ler shops at a O for 10 years ches Compar is expected to estimated us 0,000. Leches Curn of 10% 16 17 18 19 20 21 22 23 24 25 fitability index of the 14% 15% 1.000 1.000 2.140 2.150 3.440 3.473 4.921 4.993 6.610 6.742 8.536 8.754 10.73 11.07 13 23 13.73 16.09 16.79 19 34 20.30 23.04 24.35 27 27 29.00 32.09 34 35 37.58 40.50 43.84 47.58 50.98 55.72 59.12 65.08 68.39 75.84 78.97 88.21 91.02 1024 104.8 118.8 120.4 1376 138.3 159.3 158.7 1842 181.9 212.8 208.3 2457 238.5 272.9 3271 312.1 3772 356.8 434.7 1,342 1,779 4,995 7.218 ital budgeting metho se? Why? ith the company's 4450 66.76 8735 283.6 26 22 28 29 30 40 50 259.1 en hann remer Help Me Solve This Question Help 1. Cor Leches Company operates a chain of sandwich shops. (Click the icon to view additional information.) payba Read the requirements. (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.) ying aller she Info After identifying potential capital investments, managers must analyze the investments using one or more capital budgeting methods. Four popular methods of analyzing potential capital investments include: 1. Payback 2. Accounting rate of return (ARR) Dany is 3. Net present value (NPV) 4. Internal rate of return (IRR) 0 for 1 Requirement 1. Compute the payback, the ARR, the NPV, and the profitability index of these two plans. echos is expe Payback is a capital investment analysis method that measures the length of time it takes to recover, in net cash inflows, the cost of the estime initial investment. All else being equal, the shorter the payback period, the more attractive the asset. When net cash inflows are expected 00,000 to be equal each year, managers compute the payback by dividing the amount invested by the expected annual net cash inflow. Use the amounts given in the problem to calculate the payback for both plans. (Round your answers to one decimal place, X.X.) Amount invested | Expected annual net cash inflow Payback 8,500,000 1,625,000 $ 8,000,000 1,120,000 geti y? som eturn of Plan A $ 5.2 years 7.1 years Plan B index of these Calculate the ARR (accounting rate of return) for both plans, More Info Companies are in business to eam profits. The (ARR) is a capital investment analysis method that measures the profitability of an investment by dividing the average annual operating income by the average amount invested Generally accepted accounting principles (GAAP) are based on accrual accounting, but capital budgeting focuses on cash flows. The he company is ght smaller and desirability of a capital asset depends on its ability to generate net cash infows--that is cash inflows in excess of cash outflows-over 560,000 for the asset's useful life. Recall that operating income based on accrual accounting contains noncash expenses, such as depreciation expense and bad debts expense. These expenses decrease operating income but do not require a cash outlay. The capital investment's lan B, Leches net cash inflows, therefore, will differ from its operating income of the four popular capital budgeting methods, only the accounting rate this plan is explof roturn method uses accrual-based accounting income. The other three methods use the investment's projected net cash inflows." bars, the estim is $1,200,000 Begin by calculating the expected average annual operating income for each plan. To determine this amount, we must subtract the nnual return of non-cash annual depreciation expense from the expected annual net cash inflow for each plan Expected annual net cash inflow Annual depreciation expense = Average annual operating income Plan A $ 1,625,000 $ 850,000 = $ 775,000 Plan B $ 1,120.000 $ 670,000 $ 450,000 goting methods y? company's Complete the Otorine the index of these More Info divide the sum of the amount invested and the investment's estimated residual value by two. (Round your answers to the nearest tenth percent. XX%) Average annual operating income / Average amount invested ARR The company is Plan A $ 775,000 4.250,000 18.2% eight smaller she s Plan B 450.000 4,650,000 $1,550,000 for 1 Plan B, Leches A dollar received today is worth more than a dollar to be received in the future because you can invest today's dollar and earn additional This plan is expo interest so you'll have more cash in the future. The fact that invested cash earns income over time is called the time value of money. This years, the estim concept explains why we would prefer to receive cash sooner rather than later. The time value of money means that the timing of capital Bis $1.200,000 investments' net cash inflows is important. Two methods of capital investment analysis incorporate the time value of money the net annual return of present value (NPV) and internal rate of retur (IRR) Caciulate the NPV (net present value) of each plan To decide how attractive each investment is, we find its NPV NPV is a capital investment analysis method that measures the net difference between the present value of the investment's net cash inflows and the investment's cost (cash outflows). We discount the net cash inflows using the company's minimum required rate of return. This rate is called the discount rate because it is the interest rate used peting methods? y? Sompany's Index of these To calculate the net present value of Plan A we must subtract the present value of the cash outflow for the investment (which is already More Info stated in present value terms) from the total PV of cash inflows (in this case, just the present value of the annuity from the annual cash inflows), Be sure to use the Present Value of Ordinary Annuity of $1 factor table provided to determine the annuity PV factor that coincides with a 10% discount rate and 10 periods. Note that there is no expected residual value for Plan A, so the present value of the residual value will be so for this plan. The zeros related to the residual value for Plan A have been entered into the table for you. (Enter The company is any factor amounts to three decimal places, X.XXX, Use parentheses or a minus sign for a negative net present value.) eight smaller she $1,550,000 for 1 Plan A: Net Cash Annuity PV Factor PV Factor Present Plan B, Leches Years Inflow (-10%, n=10) (10%, 10) Value This plan is expe years, the estime 1 - 10 Present value of annuity $ 1,625,000 6.145 $ 9.985,625 Bis $1,200,000 10 0 Present value of residual value 0 0 annual return of Total PV of cash inflows 9,985,625 0 Initial Investment (8,500,000) Net present value of Plan A $ 1.485,625 geting methods? y? pompany's index of these Calculate the NPV of Plan B 1 More Info The computation of the NPV of Plan B must also account for the present value of the lump-sum residual value at the end of the 10 years. The annuity PV factor, which will be the same as the one you identified in your NPV computation for Plan B has been entered for you. You will have to determine the PV factor needed to determine the PV of the residual value using the Present Value of $1 factor table provided. Go ahead and complete the table below to determine the NPV of Plan B. (Enter any factor amounts to three decimal places The company is x.xxx. Use parentheses or a minus sign for a negative net present value) eight smaller she $1.550,000 for Plan : Net Cash Annuity PV Factor PV Factor Present Plan B. Laches This plan is exp Years Inflow (i=10%, n=10) (1=10%, n=10) Value years, the estime 1 - 10 Present value of annuity $ 1,120.000 6145 $ 6,882,400 Bis $1,200,000 annual return of Present value of residual value 0.386 501,800 1,300,000 Total PV of cash intows 7,384,200 0 Initial Investment (8,000,000) $ (615.800) Net present value of Plan B geting methods? y? company's 10 y index of these Calculate the profitability index of these two plans i More Info What happens if a company has more than one investment option and more than one option appears to be an attractive investment? Assuming the company can only invest in one project at this time, which one should it choose? The company may want to compute the profitability index (also known as the present value index) to assist in the decision. The profitability Index computes the number of dollars The company is returned for every dollar invested, with all calculations performed in prosent value dollars. The profitability index is computed by dividing right smaler she the present value of net cash inflows by the initial investment. Note that you have already determined the present value of cash inflows $1,550,000 for 1 when calculating the NPV of each plan. Go ahead and calculate the profitability index for each pian (Round to two decimal places XXX.) Plan B. Leches This plan is op Present value of net cash inflows Initial investment - Profitability index years, the estime Plan A $ 9,985.625 8,500,000 1.17 B is $1.200.000 annual return of Plan B $ 7.384.200 IS 8,000,000 0.92 Requirement 2. What are the strengths and weaknesses of these capital budgeting methods? Payback and accounting rate of retum are fairly quick and easy, and they work well for capital investments that have a relatively short life span, such as computer equipment and software that may have a useful life of only three to five years. Payback and accounting rate of return are also used to screen potential investments from those that are less desirable. Payback provides management with valuable information on how fast the cash invested wil he renner! The ninnatenfrahum shows the effect of the investment in the geting methods? ly? sompany's index of these Requirement 3. Which expansion plan should Lajos Company choose? Why? More Info Consider the capital budgeting models we have used to compare the two plans. We know that the shorter the payback period, the more attractive the asset, with all else being equal. The ARR measures the average rate of return over the asset's entire life. It focuses on the operating income an asset can earn Generally speaking, the plan with the higher ARR would be more attractive. NPV is the difference company is between the present value of the investment's net cash inflows and the investment's cost. The plan with the higher NPV would be more mt smaller she attractive. And finally, the higher the profitability index, which computes the number of dollars retumed for every dollar invested in 550,000 for 1 present value dollars), the more attractive the investment Review the calculations made in Requirement 1 to determine which plan in B. Laches Lajos Company should choose s plan is expe Requirement 4. Estimate Plan A's IRR. How does the IRR compare with the company's required rate of retur? 3 $1,200,000 When NPV is calculated, the PV factor is selected using the company's required rate of return. If the NPV is positive, then you know the nual return of actual rate of retum is greater than the required rate of return and it is an acceptable project. However, you do not know the actual rate of return, only that it is greater than the required rate. If the NPV is zero, then you know the actuallate is equal to the required rate. The actual rate of return is called the internal rate of return. In other words, the IRR is the interest rate that makes the initial cost of the investment equal to the present value of the investment's net cash inflows, which means the NPV is zero. The higher the IRR, the more desirable the project. geting methods y? Company's Index of these Plan A, which has an initial investment of $8,500,000, is anticipated to have 10 equal cash inflows of $1,625,000. We compute the IRR of More Info an investment with equal periodic cash flows (annuity) by taking the following steps: 1. The IRR is the interest rate that makes the cost of the investment equal to the present value of the investment's net cash inflows, so we set up the following equation: The company is Initial investment = PV of net cash inflows eight smaller she $1,550,000 for 1 Initial investment Amount of cash inflow X. Annuity PV factor (-?given) Plan B. Leches 2. Next, we plug in the information we do know-the investment cost, the equal annual net cash infows, and the number of periods: This plan is expe years, the estime $8,500,000 = $1,625,000 x Annuity PV factor (i = ?, n = 10) B is $1,200,000 3. We then rearrange the equation and solve for the Annuity PV factor (/7, n. 10) annual return of Annuity PV factor (/7, 10) Initial investment / Amount of cash inflow - $8,500,000 $1,625.000 5.231 Round to three decimal places, XXXX) geting methods? y? Jompany's y? Company's Plan B, Leches This plan is expe years, the estime Bis $1,200,000 annual return of 4. Finally, we find the interest rate for interest rate range) that corresponds to this Annuity PV factor. Review the Present Value of Ordinary Annuity of 1 factor table Scan the row corresponding to the plan's expected life of 10 periods. Choose the percentage range that the number from Step 3-5.231-falls between The IRR (internal rate of return) of Plan Ais between 12%-14% How does the IRR compare with the company's required rate of rotum? Note that the IRR of 12%-14% exceeds the company's hurdle rate of 10%. This makes sense since the NPV of the project, using the 10% hurdle rate is a positive amount-$1,485,625