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Show all the calculations. P25-408 Qwizmo operates a chain of sandwich shops. The company is considering two alternative expansion plans. Plan A is to open
Show all the calculations.
P25-408 Qwizmo operates a chain of sandwich shops. The company is considering two alternative expansion plans. Plan A is to open two smaller shops at a total cost of $844,000. Expected annual net cash inflows are $150,000, with zero residual value at the end of 10 years. Under plan B, Qwizmo would open one larger shop at a cost of $834,000. This plan is expected to generate net cash inflows of $90,000 per year for 10 years, the estimated life of the shop. Estimated residual value is $100,000. Qwizmo uses straight-line depreciation and requires an annual return of 8%. Requirements 1. Compute the payback period (p. 1267), the accounting rate of return (p. 1269), and the net present value (pp. 1270-1273) of these two plans. Use the residual value when calculating the accounting rate of return for plan B, but assume a residual value of zero when calculat- ing its net present value. What are the strengths and weaknesses of these capital budgeting models? (pp. 1275-1276) 2. Which expansion plan should Qwizmo choose? Why? (p. 1273) 3. Estimate plan A's internal rate of return (IRR). How does the IRR compare with the company's required rate of return? (p. 1273)Step by Step Solution
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