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Read the requirements

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Requirement $1.$ Compute the payback period, the ARR, and the NPV of these two plans. What are the strengths and weaknesses of these capital budgeting models?

Begin by computing the payback period for both plans. $($Round your answers to one decimal place.$)$

Plan $A($in years$)$

Plan B $($in years$)$

Now compute the ARR $($accounting rate of return$)$ for both plans. $($Round the percentages to the nearest tenth percent.$)$

Plan $A\%$

Plan $B\%$

Next compute the NPV $($net present value$)$ under each plan. Begin with Plan A$,$ then compute Plan B$.($Round your answers to the nearest whole dollar and use parentheses or a minus sign to represent a negative NPV$.)$

Net present value of Plan $A$

Net present value of Plan B

Match the term with the strengths and weaknesses listed for each of the three capital budgeting models.

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 two 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.

Requirement $2.$ Which expansion plan should Mugs choose? Why?

Recommendation: Invest in

It has the

net present value. It also has a

payback period.

Requirement $3.$ Estimate Plan A$\text{'}$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 $10\%.$