Abrahms operates a chain of sandwich shops. The company is considering two possible expansion plans. Plan A

Question:

Abrahms operates a chain of sandwich shops. The company is considering two possible expansion plans. Plan A would open eight smaller shops at a cost of $9,450,000. Expected annual net cash inflows are $1,890,000 with zero residual value at the end of 10 years. Under Plan B, Abrahms would open three larger shops at a cost of $9,400,000. This plan is expected to generate net cash inflows of $1,175,000 per year for 10 years, the estimated life of the properties. Estimated residual value is $1,880,000. Abrahms uses straight-line depreciation and requires an annual return of 8%.
Requirements
1. Compute the payback period, the ARR, and the NPV of these two plans. What are the strengths and weaknesses of these models?
2. Which expansion plan should Abrahms choose? Why?
3. Estimate Plan A's IRR. How does the IRR compare with the company's required rate of return?
Capital Budgeting
Capital budgeting is a practice or method of analyzing investment decisions in capital expenditure, which is incurred at a point of time but benefits are yielded in future usually after one year or more, and incurred to obtain or improve the...