Milagro Caf is considering two alternative expansion plans. Plan (mathrm{A}) is to open four cafs at a

Milagro Café is considering two alternative expansion plans. Plan \(\mathrm{A}\) is to open four cafés at a total cost of \(\$ 2,090,000\). Expected annual net cash inflows are \(\$ 400,000\), with residual value of \(\$ 300,000\) at the end of six years. Under plan B, Milagro Café would open six cafés at a total cost of \(\$ 2,100,000\). This investment is expected to generate net cash inflows of \(\$ 500,000\) each year for six years, which is the estimated useful life of the properties. Estimated residual value of the plan B cafés is zero. Milagro Café uses straight-line depreciation and requires an annual return of \(10 \%\).

Requirements 

1. Compute the payback period, the accounting rate of return, and the net present value of each plan. Use the residual value when calculating the accounting rate of return for plan A, but assume a zero residual value when calculating its net present value. What are the strengths and weaknesses of these capital budgeting models? 

2. Which expansion plan should Milagro Café adopt? Why? 

3. Estimate the internal rate of return (IRR) for plan B. How does plan B's IRR compare with Milagro Café's required rate of return?