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 $1,525,000 for 10 ?years, with zero residual value at the end of 10 years. Under Plan? B, Lukes Company would open three larger shops at a cost of $8,250,000. This plan is expected to generate net cash inflows of $1,120,000 per year for 10 ?years, the estimated useful life of the properties. Estimated residual value for Plan B is $980,000. LukesCompany uses? straight-line depreciation and requires an annual return of 10?%.

Lukes Company operates a chain of sandwich shops. (Click the icon to view Present Value of $1 table.) 0 (Click the icon to view additional information) (Click the icon to view Present Value of Ordinary Annuity of $1 table.) Read the muirements. (Click the icon to view Future Value of $1 table.) (Click the icon to view Future Value of Ordinary Annuity of $1 table.) E) 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. X.Xt) I:l+ = Payback Plan A I + = years PlanB I + = years Calculate the ARR (accounting rate of return) for both plans. (Round your answers to the nearest tenth percent, X.X%.) + = ARR PlanA + = % PlanB + = % Caclulate the NPV (net present value) of each plan. Begin by calculating the NPV of Plan A. (Complete all answer boxes. Enter a '0' for any zero balances or amounts that do not apply to the plan. Enter any factor amounts to three decimal places, X.XXX. Use parentheses or a minus sign for a negative net present value.) Plan A: Net Cash Annuity PV Factor PV Factor Present Years Inow (i=10%, n=10) (i=10%, n=10) Value 1 - 10 Present value of annuity 10 Present value of residual value Total PV of cash inows 0 Initial Investment Net present value of Plan A Calculate the NPV of Plan B. (Complete all answer boxes. Enter a "0" for any zero balances or amounts that do not apply to the plan. Enter any factor amounts to three decimal places, X.XXX. Use parentheses or a minus sign for a negative net present value.) Plan B: Net Cash Annuity PV Factor PV Factor Present Calculate the profitability index of these two plans. (Round to two decimal places X.XX.) = Profitability index Plan A Plan B 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 Lukes Company choose? Why? Lukes 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'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 10%.\fX Reference Present Value of Ordinary Annuity of $1 Periods 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 12% 14% 15% 16% 18% 20% Period 1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909 0.893 0.877 0.870 0.862 0.847 0.833 Period 2 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 1.605 1.566 1.528 2.775 2.723 2.673 2.624 2.577 2.531 2.487 2.402 2.322 2.283 2.246 2.174 2.106 Period 3 2.941 2.884 2.829 2.798 2.690 2.589 Period 4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.037 2.914 2.855 Period 5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791 3.605 3.433 3.352 3.274 3.127 2.991 Period 6 5.417 5.242 5.076 4.917 4.767 4.623 4.486 4.355 4.111 3.889 3.784 3.685 3.498 3.326 5.795 5.601 Period 7 6.472 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868 4.564 4.288 4.160 4.039 3.812 3.605 6.728 Period 8 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.335 4.968 4.639 4.487 4.34 4.078 3.837 4.607 4.303 |4.03 Period 9 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 Period 10 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 4.833 4.494 4.192 9.253 8.760 8.306 7.887 7.499 7.139 6.805 6.495 5.938 5.453 5.234 5.029 4.656 4.327 Period 11 10.368 9.787 Period 12 11.255 10.575 9.954 9.385 8.863 8.384 7.943 7.536 7.161 6.814 6.194 5.660 5.421 5.197 4,793 4.439 5.342 4.910 4.533 Period 13 12.134 11.348 10.635 9.986 394 8.853 8.358 7.904 7.487 |7.103 6.424 5.842 5.583 5.468 5.008 4.611 Period 14 13.004 12.106 11.296 10.563 9.899 9.295 8.745 8.244 7.786 7.367 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 5.575 5.092 4.675 Period 15 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 5.669 Period 16 5.162 4.730 5.749 5.222 4.775 Period 17 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 5.818 5.273 4.812 Period 18 17.226 15.678 14.324 13.134 12.085 11.158 10.336 9.604 8.950 8.365 7.366 6.550 6.198 5.877 5.316 4.844 Period 19 18.046 16.351 14.877 13.590 12.462 11.470 10.594 9.818 9.129 8.514 7.469 6.623 6.259 5.929 5.353 4.870 Period 20 7.562 6.687 6.312 5.973 5.384 4.89 Period 21 18.857 17.011 15.415 14.029 12.821 11.764 10.836 10.017 9.292 8.649 Period 22 19.660 17.658 15.937 14.451 13.163 12.042 11.061 10.201 9.442 8.772 7.645 6.743 6.359 6.011 5.410 4.909 Period 23 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 6.044 5.432 4.925 6.073 |4.937 Period 24 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 5.451 Period 25 22.023 19.523 17.413 15.622 14.094 12.783 11.654 10.675 9.823 9.077 7.843 6.873 6.464 6.097 5.467 | 4.948 22.795 20.121 17.877 15.983 14.375 13.003 11.826 10.810 9.929 9.161 7.896 6.906 6.491 6.118 5.480 4.956 Period 26 Period 27 23.560 20.707 18.327 16.330 14.643 13.211 11.987 10.935 10.027 9.237 7.943 6.935 6.514 6.136 5.492 4.964 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 6.152 5.502 4.970 Period 28 2 6.983 6.166 Period 29 25.066 21.844 19.188 16.984 15.141 13.591 12.278 11.158 10.198 9.370 8.022 6.551 5.510 4.975 6.566 6.177 5.517 Period 30 25.808 22.396 19.600 17.292 15.372 13.765 12.409 11.258 10.274 9.427 8.055 7.003 Period 40 32.835 27.355 23.115 19.793 17.159 15.046 13.332 11.925 10.757 9.779 8.244 7.105 6.642 6.233 5.548 4.997 39.196 31.424 25.730 21.482 18.256 15.762 13.801 12.233 10.962 9.915 8.304 7.133 6.661 6.246 5.554 4.999 Period 50 Print Done- X Reference Future Value of $1 12% 14% 15% Periods 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 1.120 1.140 1.150 Period 1 1.010 1.020 1.030 1.040 1.050 1.060 1.070 1.080 1.090 1.100 1.061 1.082 1.103 1.124 1.145 1.166 1.188 1.210 1.254 1.300 1.323 Period 2 1.020 1.040 1.331 1.405 1.482 1.521 Period 3 1.030 1.061 1.093 1.125 1.158 1.191 1.225 1.260 1.295 1.216 1.262 1.311 1.360 1.412 1.464 1.574 1.689 1.749 Period 4 1.041 1.082 1.126 1.170 1.338 1.403 1.469 1.539 1.611 1.762 1.925 2.011 Period 5 1.051 1.104 1.159 1.217 1.276 1.587 1.677 1.772 1.974 2.195 2.313 Period 6 1.062 1.126 1.194 1.265 1.340 1.419 1.501 1.606 1.714 1.828 1.949 2.211 2.502 2.660 Period 7 .072 1.149 1.230 1.316 1.407 1.504 2.476 2.853 3.059 Period 8 .083 1.172 1.267 1.369 1.477 1.594 1.718 1.851 3 2.144 1.838 1.999 2.172 2.358 2.773 3.252 3.518 Period 9 1.09 1.195 1.305 1.423 1.551 1.689 1.344 1.480 1.629 1.791 1.967 2.159 2.367 2.594 3.106 3.707 4.046 Period 10 1.105 1.219 2.853 3.479 4.226 4.652 Period 11 1.116 1.243 1.384 1.539 1.710 1.898 2.105 2.332 2.580 Period 12 1.127 1.268 1.426 1.601 1.796 2.012 2.252 2.518 2.813 3.138 3.896 4.818 5.350 4.363 5.492 6.153 Period 13 1.138 1.294 1.469 1.665 1.886 2.133 2.410 2.720 3.066 3.452 3.342 3.798 4.887 6.261 7.076 Period 14 1.149 1.319 1.513 1.732 1.980 2.261 2.579 2.937 2.397 2.759 3.172 3.642 4.177 5.474 7.138 8.137 Period 15 1.161 1.346 1.558 1.801 2.079 2.183 2.540 2.952 3.426 3.970 4.595 6.130 8.137 9.358 Period 16 1.173 1.373 1.605 1.873 1.400 1.653 1.948 2.292 2.693 3.159 3.700 4.328 5.054 6.866 9.276 10.76 Period 17 1.184 2.407 2.854 3.380 3.996 |4.717 5.560 7.690 10.58 12.38 Period 18 1.196 1.428 1.702 2.026 Period 19 1.208 1.457 1.754 2.107 2.527 3.026 3.617 4.316 5.142 6.116 8.613 12.06 14.23 9.646 16.37 Period 20 1.220 1.486 1.806 2.191 2.653 3.207 3.870 4.661 5.604 6.727 13.74 18.82 Period 21 1.232 1.516 1.860 2.279 2.786 3.400 4.141 5.034 6.109 |7.400 10.80 15.67 1.546 1.916 2.370 2.925 3.604 4.430 5.437 6.659 8.140 12.10 17.86 21.64 Period 22 1.245 5.871 7.258 8.954 13.55 20.36 24.89 Period 23 1.257 1.577 1.974 2.465 3.072 3.820 4.741 15.18 23.21 28.63 Period 24 1.270 1.608 |2.033 2.563 3.225 4.049 5.072 6.341 7.911 9.850 6.848 8.623 10.83 17.00 26.46 32.92 Period 25 1.282 1.641 2.094 2.666 3.386 4.292 5.427 7.396 9.399 11.92 19.04 30.17 37.8 Period 26 1.295 1.673 2.157 2.772 3.556 4.549 5.807 6.214 7.988 10.25 13.11 21.32 34.39 43.54 Period 27 1.308 1.707 2.221 2.883 3.733 4.822 1.321 1.741 2.288 2.999 3.920 5.112 6.649 8.627 11.17 14.42 23.88 39.20 50.07 Period 28 15.86 26.75 44.69 57.58 Period 29 1.335 1.776 2.357 3.119 4.116 5.418 7.114 9.317 12.17 |13.27 17.45 29.96 50.95 66.21 Period 30 1.348 1.811 2.427 3.243 4.322 5.743 7.612 10.06 3.262 4.801 7.040 10.29 14.97 21.72 31.41 45.26 93.05 188.9 267.9 Period 40 1.489 2.208 700.2 1,084 Period 50 1.645 2.692 4.384 7.107 11.47 18.42 29.46 46.90 74.36 117.4 289.0 Print Done- X Reference Future Value of Ordinary Annuity of $1 Periods 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 12% 14% 15% 1.000 1.000 1.000 Period 1 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 Period 2 2.010 2.020 2.030 2.040 2.050 2.060 2.070 2.080 2.090 2.100 2.120 2.140 2.150 Period 3 3.030 3.060 3.091 3.122 3.153 3.184 3.215 3.246 3.278 3.310 3.374 3.440 3.473 4.375 4.506 4.573 4.641 4.779 4.921 4.993 Period 4 4.060 4.122 4.184 4.246 4.310 4.440 Period 5 5.101 5.204 5.309 5.416 5.526 5.637 5.751 5.867 5.985 6.105 6.353 6.610 6.742 Period 6.152 6.308 6.468 6.633 6.802 6.975 7.153 7.336 7.523 7.716 8.115 8.536 8.754 7.214 7.434 7.662 7.898 8.142 8.394 8.654 8.923 9.200 9.487 10.09 10.73 11.07 Period 7 8.583 8.892 9.214 9.549 9.897 10.260 10.64 11.03 11.44 12.30 13.23 13.73 Period 8 8.286 Period 9 9.369 9.755 10.16 10.58 11.03 11.49 11.98 12.49 13.02 13.58 14.78 16.09 16.79 Period 10 10.95 11.46 12.01 12.58 13.18 13.82 14.49 15.19 15.94 17.55 19.34 20.30 10.46 Period 11 20.65 23.04 4 24.35 11.57 12.17 12.81 13.49 14.21 14.97 15.78 16.65 17.56 18.53 13.41 14.19 15.03 15.92 16.87 17.89 18.98 20.14 21.38 24.13 27.27 29.00 Period 12 12.68 Period 13 13.81 14.68 15.62 16.63 17.71 18.88 20.14 21.50 22.95 24.52 28.03 32.09 34.35 18.29 19.60 21.02 22.55 24.21 26.02 27.98 32.39 37.58 |40.50 Period 14 14.95 15.97 17.09 37.28 43.84 47.58 Period 15 16.10 17.29 18.60 20.02 21.58 23.28 25.13 27.15 29.36 31.77 Period 16 17.26 18.64 4 20.16 21.82 23.66 25.67 27.89 30.32 33.00 35.95 42.75 50.98 55.72 Period 17 18.43 20.01 1 21.76 23.70 25.84 28.21 30.84 33.75 36.97 40.54 48.88 59.12 65.08 Period 18 19.61 21.41 23.41 25.65 28.13 30.91 34.00 37.45 41.30 45.60 55.75 68.39 75.84 22.84 25.12 2 27.67 30.54 33.76 37.38 51.16 |63.44 78.97 88.21 Period 19 20.81 24.30 26.87 2 29.78 33.07 36.79 41.00 45.76 51.16 57.28 72.05 91.02 102.4 Period 20 22.02 25.78 35.72 44.87 50.42 56.76 64.00 81.70 104.8 118.8 Period 21 23.24 8 28.68 31.97 39.99 137.6 Period 22 24.47 27.30 30.54 34.25 38.51 43.39 49.01 55.46 62.87 71.40 92.50 120.4 25.72 28.85 32.45 36.62 41.43 47.00 53.44 60.89 69.53 79.54 104.6 138.3 159.3 Period 23 Period 24 26.97 30.42 34.43 39.08 44.50 50.82 38 18 66.76 76.79 88.50 118.2 158.7 184.2 28.24 32.03 36.46 41.65 47.73 54.86 63.25 73.11 84.70 98.35 133.3 181.9 9 212.8 Period 25 Period 26 29.53 33.67 38.55 44.31 51.11 59.16 68.68 79.95 93.32 109.2 150.3 208.3 245.7 Period 27 30.82 35.34 40.71 47.08 54.67 63.71 74.48 87.35 102.7 121.1 169.4 238.5 283.6 Period 28 32.13 37.05 42.93 49.97 58.40 68.53 80.70 95.34 113.0 134.2 190.7 272.9 327.1 Period 29 33.45 38.79 45.22 52.97 62.32 73.64 87.35 104.0 124.1 148.6 214.6 312.1 377.2 34.78 40.57 47.58 56.08 66.44 79.06 94.46 113.3 136.3 164.5 5 241.3 356.8 434.7 Period 30 Period 40 48.89 60.40 75.40 95.03 120.8 154.8 199.6 259.1 337.9 442.6 767.1 1.342 1,779 Period 50 64.46 84.58 112.8 152.7 209.3 290.3 406.5 573.8 815.1 1,164 2,400 4,995 5|7,218 Print Done