Part 4. Chapter 26, Problem 1CPP on Chegg study workbook solutions for Horngren's Managerial Accounting (12th Edition)

Division D is considering two possible expansion plans. Plan A would expand a current product line at a cost of $8,600,000. Expected annual net cash inflows are $1,525,000 with zero residual value at the end of 10 years. Under Plan B, Division D would begin producing a new product at a cost of $8,000,000. This plan is expected to generate net cash inflows of $1,100,000 per year for 10 years, the estimated useful life of the product line. Estimated residual value for Plan B is $980,000. Division D uses STRAIGHT-LINE depreciation and requires an annual return of 10%.

A. Compute the payback, the ARR, the NPV, and the profitability index for both plans.

B. Compute the estimated IRR of Plan A.

C. Use excel to verify the NPV calculations in requirement 4(A) and the actual IRR for the two plans. How does the IRR of each plan compare with the company's required rate of return?

D. Division D must rank the plans and make a recommendation to Dillard's top management team for the best plan. Which expansion plan should Division D choose? WHY?

Requirement 4A

Payback=	Amount invested	/	Expected Annual
			net cash flow
plan A=	(answer)/	(answer)	=(answer)
plan b=	(answer)/	(answer)	=(answer)
Total net cash inflows during =	Average annual	X	Operating life
operating life of property	net cash inflow		of property
plan A=	(answer) x	10 years=	(answer)
plan B=	(answer) x	10 years=	(answer)
Total depreciation during=	cost	-	Residual Value
operating life of property
plan A=	(answer)-	$0 (or answer)=	(answer)
plan B=	(answer)-	(answer) =	(answer)
			Plan A	PlanB
Total net cash inflows during operating life of property			(answer)	(answer)
Less: Total depreciation during operating life of property			(answer)	(answer)
Total operating income during operating life			(answer)	(answer)
Divide by : Property's operating life in years			/ 10 years	/ 10 years
Average annual operating income from plan			(answer)	(answer)
Average Amount Invested	=	(Amount invested + residual value) / 2
Plan A	=	(answer)
Plan B	=	(answer)
ARR	=	(Amount annual operating income/average amount invested)
Plan A:	=	(answer)
Plan B:	=	(answer)
TIME	Net cash flow	Annuity PV factor (i=10%, n=10)	PV factor (i =10%, n=10)	Present value
Plan A
1-10 years PV of annuity	(answer)	(answer)		(answer)
0 initial investment				(answer)
NPV of Plan A				(answer)
Plan B
1-10 years PV of annuity	$0 (answer)	(answer)		(answer)
10 PV of residual value	0 (answer)		(answer)	(answer)
Total PV of net cash inflows				(answer)
0 Initial investment				(answer)
NPV of Plan B				$ (answer?)
Plan	Present value / net cash inflows	Initial investment	=	Profitability Index
A	$0 (answer) /	-	=	(answer)
B	$0 (answer) /	-	=	(answer)

Requirement 4 B

Annuity PV Factor	=	Initial Investment	/	Amount of each net cash inflow
(i=?%, n=10)
Plan A	-	/	$0 (answer)=	(answer)
Annuity PV Factors
(i = 12%, n=10)		(i=14%, n=10)
(answer)		(answer)
Plan A: Because: (answer explantion for initial investment and Aof E Net cash flow)

Requirement 4C

Dillard, inc, Division D
Capital Investment Analysis
Project:	Plan A	Plan B
Inputs:
useful Life (in years)	10	10
Discount rate	10%	10%
Initial investment	$(8,600,000)	$(8,000,000)
cash inflows:
Year 1	1,525,000	1,100,000
year 2	1,525,000	1,100,000
3	1,525,000	1,100,000
4	1,525,000	1,100,000
5	1,525,000	1,100,000
6	1,525,000	1,100,000
7	1,525,000	1,100,000
8	1,525,000	1,100,000
9	1,525,000	1,100,000
10	1,525,000	2,080,000
Totals	15,250,000	11,980,000
OUTPUTS
NPV	770,465	($863,144)
IRR	12.05%	7.57%

so Plan' a's internal rate of return IRR is 12.05%, which it turns out is greater than the co. 10% needed return rate. plans B's IRR is 7.57%, which is less than the companys 10% needed rate of return. PLEASE CHECK or fill requirement in this.

Which expansion plan should division D chose? Why?

(answer)

(explanation)

Thanks for all the help, my review is almost done.