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The company is considering two possible expansion plans Plan A would open eight smaller shops at a cost of $8,600.000. Expected annual net cash

The company is considering two possible expansion plans Plan A would open eight smaller shops at a cost of $8,600.000. Expected annual net cash inflows are $1.525,000 for 10 years, with zero residual value at the end of 10 years Under Plan B. Lemons Company would open three larger shops at a cost of $8.300.000 This plan expected to generate net cash inflows of $1,050.000 per year for 10 years, the estimated useful life of the properties Estimated residual value for Plan B is $980,000 Lemons Company uses straight-line depreciation and requires an annual return of 7% 1. Compute the payback, the ARR the NPV, and the profitability index of these two plans 2. What are the strengths and weaknesses of these capital budgeting methods? 3. Which expansion plan should Lemons Company choose? Why? 4. Estimate Plan A's IRR How does the IRR compare with the company's required rate of return?

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1 Payback Plan A The payback period is 860951525 016 years Plan B The payback period is 83001050 79 years ARR Plan A The ARR is 515258609 599 Plan B The ARR is 10508300 1267 NPV Plan A The NPV is 8609... blur-text-image

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