Question

Franklin Restaurant Group operates a chain of gourmet sandwich shops. The company is considering two possible expansion plans. Plan A would involve opening eight smaller shops at a cost of $ 8,740,000. Expected annual net cash inflows are $ 1,550,000, with zero residual value at the end of nine years. Under Plan B, Franklin would open three larger shops at a cost of $ 8,140,000. This plan is expected to generate net cash inflows of $ 1,050,000 per year for nine years, the estimated life of the properties. Estimated ­residual value for Plan B is $ 1,075,000. Franklin uses straight- line depreciation and requires an annual return of 6%.

Requirements
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?
2. Which expansion plan should Franklin choose? Why?
3. Estimate Plan A’s IRR. How does the IRR compare with the company’s required rate of return?



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  • CreatedAugust 27, 2014
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