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%.

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%. (Click the icon to view the present value annuity factor table.) (Click the icon to view the present value factor table.) (Click the icon to view the future value annuity factor table.) (Click the icon to view the future value factor table.) Read the requirements, 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 (in years) Plan B (in 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 Choose from any list or enter any number in the input fields and then continue to the next question. Match the term with the strengths and weaknesses listed for each of the three capital budgeting models. Capital budgeting models Strengths and weaknesses 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 two 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. Requirement 2. Which expansion plan should Scribbles 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? The IRR (internal rate of return) of Plan A is between This rate the company's hurdle rate of 8%. Choose from any list or enter any number in the input fields and then continue to the next