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Requirement 1. Compute the payback, the ARR, the NPV, and the profitability index of these two plans. 0 A - Requirements More Info 5.6 years Calculate the payback for both plans. (Round your answers to one decimal place, X.X.) Amount invested Expected annual net cash inflow Payback Plan A $ 8,600,000 1,525,000 Plan B $ 8,240,000 / $ 1,000,000 8.2 years Calculate the ARR (accounting rate of return) for both plans. (Round your answers to the nearest tenth percent, X.X%.) = ARR Plan A Plan B 1. Compute the payback, the ARR, the NPV, and the profitability index of these two plans. 2. What are the strengths and weaknesses of these capital budgeting methods? 3. Which expansion plan should Lados Company choose? Why? 4. Estimate Plan A's IRR. How does the IRR compare with the company's required rate of return? The company is considering two possible expansion plans. Plan A would open eight smaller shops at a cost of $8,600,000. Expected annual net cash inflows are $1,525,000 for 10 years, with zero residual value at the end of 10 years. Under Plan B, Lados Company would open three larger shops at a cost of $8,240,000. This plan is expected to generate net cash inflows of $1,000,000 per year for 10 years, the estimated useful life of the properties. Estimated residual value for Plan B is $980,000. Lados Company uses straight-line depreciation and requires an annual return of 10%. X X A - - Reference Reference Present Value of $1 + 6.728 0 4.675 Periods 1% 2% 3% 0.990 0.980 0.971 0.980 0.961 | 0.943 0.971 0.942 0.915 0.961 0.924 0.888 0.951 0.906 0.863 0.942 0.888 0.837 0.933 0.871 0.813 0.923 0.853 0.789 0.914 0.837 0.766 0.905 0.820 0.744 0.896 0.804 0.722 0.887 0.788 0.701 0.879 0.773 0.681 0.870 0.758 0.661 0.861 0.743 0.642 0.853 0.728 0.623 0.844 0.714 0.605 0.836 0.700 0.587 0.828 0.686 0.570 0.820 0.673 0.554 | 0.811 0.660 0.538 0.803 0.647 0.522 0.795 0.634 0.507 0.788 0.622 0.492 0.780 0.610 0.478 0.772 0.598 0.464 0.764 0.586 0.450 0.757 0.574 0.437 0.7490.563 0.424 0.742 0.552 0.412 0.672 0.453 0.307 50 0.608 0.372 0.228 4% 5% 6% 7% 8% 9% 0.962 0.952 0.943 0.935 0.926 0.917 0.925 0.907 | 0.890 0.873 0.8570.842 0.889 0.864 0.840 0.816 0.794 0.772 0.855 0.823 0.792 0.763 0.735 0.708 0.822 0.784 0.747 0.713 0.681 0.650 0.790 0.746 0.705 0.666 0.630 0.596 0.760 0.711 0.665 0.623 0.5830.547 0.731 0.677 0.627 0.582 0.540 0.502 0.703 0.645 0.592 0.544 0.500 0.460 0.676 0.614 0.558 0.508 0.463 0.422 0.650 0.585 0.527 0.475 0.429 0.388 0.625 0.557 0.497 0.444 0.397 0.356 0.601 0.530 0.4690.415 0.368 0.326 0.326 0.577 0.505 0.442 0.388 0.340 0.299 0.555 0.481 0.417 0.362 0.315 0.275 0.534 0.458 0.394 0.3390.292 0.252 0.513 0.436 0.371 0.317 0.270 0.231 0.494 0.416 0.350 0.296 0.250 0.212 0.475 0.396 0.331 0.277 0.232 0.194 0.456 0.377 0.3120.258 0.215 0.178 0.439 0.359 0.2940.242 0.199 0.164 0.422 0.342 0.278 0.226 0.184 0.150 0.406 0.326 0.262 0.211 0.170 0.138 0.138 0.390 0.310 0.247 0.197 0.158 0.126 0.375 0.295 0.233 0.184 0.146 0.116 0.361 0.281 0.220 0.172 0.135 0.106 0.347 0.268 0.207 0.161 0.125 0.098 0.333 0.255 0.1960.150 0.116 0.090 0.321 0.243 0.185 0.141 0.1070.082 0.308 0.231 0.174 0.131 0.099 0.075 0.208 0.142 0.097 0.067 0.046 0.032 0.141 0.087 0.054 0.034 0.021 0.013 10% 12% 14% 15% 16% 18% 20% 0.909 0.893 0.877 0.870 0.862 0.847 0.833 0.826 0.797 0.769 0.756 0.743 0.7180.694 0.751 0.712 0.675 0.658 0.641 0.609 0.579 0.683 0.636 0.592 0.572 0.552 0.516 0.482 0.621 0.567 0.519 0.497 0.476 0.437 0.402 0.564 0.507 0.456 0.432 0.410 0.370 0.335 0.513 0.452 0.400 0.376 0.354 0.314 0.279 0.467 0.351 0.327 0.305 0.266 0.233 0.424 0.361 0.308 0.284 0.263 0.225 0.194 0.386 0.322 0.270 0.227 0.191 0.162 0.350 0.287 0.237 0.215 0.195 0.162 0.135 0.319 0.257 0.208 0.187 0.168 0.137 0.112 0.290 0.229 0.182 0.163 0.145 0.116 0.093 0.263 | 0.205 0.1600.141 0.125 0.099 0.078 0.239 0.183 0.140 0.123 0.108 0.084 0.065 0.163 0.123 0.107 0.093 0.071 0.054 0.198 0.146 0.108 0.093 0.080 0.060 0.045 0.180 0.130 0.095 0.081 0.069 0.051 0.038 0.164 0.116 0.083 0.070 0.060 0.043 0.031 0.149 0.104 0.073 0.061 0.051 0.037 0.026 0.135 0.093 0.064 0.053 0.044 0.031 0.022 0.123 0.083 0.056 0.046 0.038 0.026 0.018 0.112 0.074 | 0.049 0.040 0.033 0.022 0.015 0.1020.066 0.043 0.035 0.028 0.019 0.013 0.092 0.0590.038 0.030 0.024 0.0160.010 0.084 0.053 0.033 0.026 0.021 0.014 0.009 0.076 0.047 0.029 0.023 0.0180.0110.007 0.069 0.042 0.026 0.0200.0160.0100.006 0.063 0.037 0.022 0.017 0.014 0.008 0.005 0.057 0.033 0.020 0.015 0.012 0.007 0.004 0.022 0.011 0.005 0.0040.003 0.001 0.001 0.009 0.003 0.001 0.001 0.001 Present Value of Ordinary Annuity of S1 Periods 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 12% 14% 15% 16% 18% 20% 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.9090.893 0.877 0.870 0.862 0.847 0.833 1.970 1.942 1.913 1.886 | 1.859 | 1.833 | 1.808 | 1.783 1.759 1.736 1.690 1.647 1.626 1.605 1.566 | 1.528 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487 2.402 2.322 2.283 2.246 2.174 2.106 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.3123.240 3.170 3.037 2.914 2.855 2.798 2.690 2.589 4.853 4.713 4.580 4.452 | 4.329 | 4.212 4.100 3.993 3.890 3.791 3.605 3.433 3.352 3.274 3.127 2.991 5.795 5.601 5.417 5.242 5.076 4.917 4.767 | 4.623 4.4864.355 4.111 3.889 3.784 3.685 3.498 3.326 6.472 6.230 6.002 5.786 5.5825.389 5.206 5.033 | 4.868 4.564 4.288 4.160 4.039 3.812 3.605 7.652 7.325 | 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.335 4.968 4.639 4.487 4.344 4.078 3.837 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.995 5.759 5.328 4.946 | 4.772 4.607 4.303 4.031 9.471 8.983 8.530 8.111 | 7.722 7.360 7.024 6.710 6.418 6.145 5.650 5.216 5.019 4.833 4.494 4.192 10.368 | 9.7879.2538.760 8.306 7.887 7.499 7.139 6.805 6.495 5.938 5.453 5.234 5.029 4.656 4.327 11.255 10.575 9.954 9.385 8.863 8.384 | 7.943 | 7.536 7.161 6.814 6.194 5.660 5.421 5.1974.793 4.439 12.134 11.348 10.635 9.986 9.394 8.853 8.358 7.904 7.487 7.103 6.424 5.842 5.583 5.342 4.910 4.533 13.004 12.106 11.296 10.563 9.899 9.295 8.745 8.244 7.786 7.3676.628 6.0025.724 5.4685.008 4.611 13.865 12.849 11.938 11.118 10.380 9.712 9.108 8.559 8.061 7.6066.811 6.142 5.8475 .575 5.092 14.718 13.578 12.561 11.652 10.838 10.106 9.447 8.851 8.313 7.8246.9746.265 5.954 5.669 5.162 4.730 15.562 14.292 13.166 12.166 11.274 10.477 9.763 9.122 8.544 8.022 7.120 6.373 6.047 5.749 5.222 4.775 16.398 14.992 13.754 12.659 11.690 10.828 10.059 9.372 8.756 8.2017.250 6.467 6.128 5.818 5.273 4.812 17.226 15.678 14.324 13.134 12.085 | 11.158 10.336 9.604 8.950 8.365 7.366 6.5506.198 5.8775.316 4.844 18.046 16.351 14.877 13.590 12.462 | 11.470 10.5949.818 9.129 8.514 7.469 6.623 6.259 5.9295.353 4.870 18.857 17.011 15.415 14.029 12.821 11.764 10.836 10.017 9.292 8.649 7.562 6.687 6.312 5.9735.384 4.891 19.660 17.658 15.937 14.451 13.163 12.042 11.061 10.2019.442 8.772 7.645 6.7436.3596.011 5.410 4.909 20.456 18.292 16.444 14.857 13.489 12.303 11.272 10.371 9.5808.883 7.718 6.792 6.399 6.044 5.432 4.925 21.243 18.914 16.936 15.247 13.799 12.550 11.469 10.529 9.7078.985 7.784 6.835 6.434 6.073 5.451 4.937 22.023 19.523 17.413 15.622 14.094 12.783 11.654 10.675 9.8239.077 7.843 6.873 6.464 6.097 5.467 4.948 22.795 20.121 17.877 15.983 14.375 13.003 11.826 10.810 9.929 9.161 7.896 6.906 6.491 6.118 5.480 4.956 23.560 20.707 18.327 16.330 14.643 13.211 11.987 10.935 10.027 9.237 7.9436.935 6.514 6.136 5.492 4.964 24.316 21.281 18.764 16.663 14.898 13.406 12.137 11.051 10.116 9.307 7.984 6.961 | 6.534 6.1525.502 4.970 25.066 21.844 19.188 16.984 15.141 13.591 | 12.278 11.158 10.1989.370 8.022 6.983 6.551 6.166 5.510 4.975 25.808 22.396 19.600 17.292 15.372 13.765 12.409 11.258 10.274 9.4278.0557.0036.566 6.1775.517 4.979 32.835 27.355 23.115 19.793 17.159 15.046 13.332 11.925 10.757 9.779 8.244 7.105 6.642 6.233 5.548 4.997 39.196 31.424 25.730 21.482 18.256 15.762 13.801 12.233 10.962 9.915 8.304 7.133 6.661 6.246 5.554 4.999 0.218 0 More Info Requirements The company is considering two possible expansion plans. Plan A would open eight smaller shops at a cost of $8,600,000. Expected annual net cash inflows are $1,525,000 for 10 years, with zero residual value at the end of 10 years. Under Plan B, Lados Company would open three larger shops at a cost of $8,240,000. This plan is expected to generate net cash inflows of $1,000,000 per year for 10 years, the estimated useful life of the properties. Estimated residual value for Plan B is $980,000. Lados Company uses straight-line depreciation and requires an annual return of 10%. 1. Compute the payback, the ARR, the NPV, and the profitability index of these two plans. 2. What are the strengths and weaknesses of these capital budgeting methods? 3. Which expansion plan should Lados Company choose? Why? 4. Estimate Plan A's IRR. How does the IRR compare with the company's required rate of return? i Reference - X A Reference - X Future Value of $1 Periods Periods Future Value of Ordinary Annuity of $1 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 12% 14% 15% 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 2.010 2.020 2.030 2.040 2.050 2.060 2.070 2.080 2.090 2.100 2.120 2.140 2.150 3.0303.060 3.091 3.122 3.153 3.1843.215 3.246 | 3.278 3.310 3.374 3.440 3.473 4.060 4.122 | 4.184 | 4.246 4.310 4.375 4.440 4.506 4.573 4.641 4.779 4.921 4.993 5.101 5.204 5.309 5.416 5.526 5.637 5.867 5.985 6.105 6.353 6.610 6.742 6.152 6.308 6.468 6.633 6.8026.975 | 7.153 7.336 7.523 7.7168.1158.536 8.754 7.214 7.434 | 7.662 7.898 8.142 8.394 8.654 8.923 | 9.200 9.487 | 10.09 10.73 11.07 8.286 8.583 8.8929.214 9.549 9.897 10.260 | 10.64 11.03 | 11.44 | 12.30 13.23 13.73 9.369 9.755 10.16 10.58 | 11.03 | 11.49 | 11.98 | 12.49 13.02 13.58 | 14.78 16.09 | 16.79 10.46 | 10.95 11.46 12.01 12.58 13.18 13.82 14.49 15.19 15.94 | 17.55 | 19.34 20.30 11.57 | 12.17 | 12.81 13.49 14.21 14.97 | 15.78 16.65 17.56 18.53 20.65 23.04 24.35 12.68 13.41 14.19 15.03 15.92 16.87 | 17.89 18.98 20.14 21.38 24.13 27.27 29.00 13.81 14.68 | 15.62 16.63 | 17.71 18.88 | 20.14 21.50 22.95 24.52 | 28.03 32.09 34.35 14.95 15.97 17.09 18.29 | 19.60 21.02 22.55 24.21 26.02 27.98 | 32.39 40.50 16.10 17.29 18.60 20.02 21.58 23.28 25.13 27.15 29.36 31.77 | 37.28 43.84 47.58 17.26 18.64 20.16 21.82 23.66 25.67 27.89 30.32 33.00 35.95 42.75 50.98 55.72 18.43 20.01 21.76 23.70 25.84 28.21 30.84 33.75 36.97 40.54 48.88 59.12 65.08 19.61 21.41 23.41 25.65 28.13 30.91 | 34.00 37.45 41.30 45.60 55.75 68.39 75.84 20.81 22.84 25.12 27.67 30.54 33.76 37.38 41.45 46.02 51.16 63.44 | 78.97 88.21 22.02 24.30 26.87 29.78 33.07 36.79 | 41.00 45.76 51.16 57.28 72.05 | 91.02 102.4 23.24 25.78 28.68 31.97 35.72 39.99 | 44.87 50.4256.76 64.00 81.70 104.8 | 118.8 24.47 27.30 30.54 34.25 38.51 43.39 | 49.01 55.46 62.87 71.40 92.50 | 120.4 137.6 25.72 28.85 32.45 36.62 41.43 47.00 53.44 60.89 69.53 79.54 104.6 138.3 159.3 26.97 30.42 34.43 39.08 44.50 50.82 58.18 66.76 | 76.79 88.50 118.2 158.7 184.2 28.24 32.03 36.46 41.65 47.73 54.86 63.25 73.11 84.70 98.35 | 133.3 | 181.9 212.8 29.53 33.67 38.55 44.31 51.11 59.16 68.68 79.95 93.32 109.2 150.3 208.3 245.7 30.82 35.34 40.71 47.08 54.67 63.71 | 74.48 87.35 | 102.7 121.1 169.4 238.5 283.6 32.13 37.05 42.93 49.97 58.40 68.53 80.70 95.34 113.0 134.2 190.7 272.9 327.1 33.45 38.79 45.22 52.97 62.32 73.64 87.35 104.0 | 124.1 148.6 214.6 312.1 377.2 34.78 40.57 47.58 56.08 66.44 79.06 94.46 113.3 136.3 164.5 241.3 356.8 434.7 48.89 60.40 95.03 120.8 154.8 199.6 259.1 337.9 442.6 767.1 1,342 1,342 1,779 64.46 84.58 | 112.8 152. 7 209.3 290.3 406.5 573.8 815.1 1,164 2,400 4,995 7,218 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 12% 14% 1.010 1.020 1.030 1.040 1.050 1.000 1.070 1.080 1.090 1.100 1.120 1.140 1.020 1.040 | 1.061 1.082 1.103 1.124 | 1.145 | 1.166 1.188 1.210 1.254 1.300 1.030 | 1.061 1.093 1.125 1.158 1.191 1.225 1.260 1.295 | 1.331 | 1.405 1.482 1.041 1.082 | 1.126 1.170 | 1.216 | 1.262 1.311 | 1.360 1.412 1.464 1.574 1.689 1.051 | 1.104 1.159 | 1.217 | 1.276 1.338 1.403 1.469 1.539 1.611 1.762 1.925 1.062 1.126 | 1.194 | 1.265 1.340 1.419 1.501 | 1.587 1.677 1.772 1.974 2.195 1.072 1.149 1.230 | 1.316 1.407 1.504 1.606 1.714 1.828 | 1.949 2.211 2.502 1.083 | 1.172 1.267 1.369 1.477 | 1.594 | 1.718 | 1.851 1.993 2.144 2.476 2.853 1.094 | 1.195 1.305 | 1.423 1.551 | 1.689 | 1.838 1.999 2.172 2.358 2.773 3.252 1.105 | 1.219 1.344 | 1.480 1.629 1.791 | 1.967 2.159 2.367 2.594 3.106 3.707 1.116 1.243 1.384 1.539 1.710 | 1.898 2.105 2.332 2.580 2.853 3.479 | 4.226 1.127 | 1.268 1.426 1.601 | 1.796 2.012 2.252 2.518 2.813 3.138 3.896 4.818 1.138 1.294 1.469 1.665 1.886 2.133 2.410 2.720 3.066 3.452 4.363 5.492 1.149 | 1.319 | 1.513 1.732 1.980 | 2.261 2.579 2.937 3.342 3.798 4.8876.261 1.161 | 1.346 1.558 1.801 2.079 2.397 2.759 3.172 3.642 4.177 5.474 7.138 1.173 | 1.373 | 1.605 1.873 2.183 2.540 2.952 3.970 4.595 6.130 8.137 1.184 1.400 1.653 1.948 2.292 2.693 3.159 3.700 4.328 5.054 6.866 9.276 1.196 1.428 1.702 2.026 2.407 2.854 3.380 3.996 4.717 5.560 7.690 10.58 1.208 1.457 1.754 2.107 2.527 3.026 3.617 4.316 5.1426.116 8.613 12.06 1.220 1.486 | 1.806 2.191 2.653 3.207 3.870 4.661 5.604 6.727 9.646 13.74 1.232 1.516 1.860 2.279 2.786 3.400 | 4.141 5.034 6.109 7.400 10.80 15.67 1.245 1.546 1.916 2.370 2.925 3.604 4.430 5.437 6.659 8.140 12.10 17.86 1.257 1.577 1.974 2.465 3.072 3.820 4.741 5.871 | 7.258 8.954 13.55 20.36 1.270 1.608 2.033 2.563 3.225 4.049 5.072 6.341 7.911 9.850 15.18 23.21 1.282 1.641 2.094 2.666 3.386 4.292 5.427 6.848 8.623 10.83 17.00 26.46 1.295 1.673 2.157 2.772 3.556 4.549 5.807 7.396 9.399 | 11.92 19.04 30.17 1.308 1.707 2.221 2.883 3.733 4.822 6.214 7.988 10.25 13.11 | 21.32 34.39 1.321 1.741 2.288 2.999 3.920 5.112 6.649 8.627 11.17 14.42 23.88 39.20 1.335 1.776 2.357 | 3.119 | 4.116 5.4187.114 9.317 12.17 | 15.86 26.75 44.69 1.348 1.811 2.427 3.243 4.3225.743 7.612 10.06 13.27 17.45 29.96 50.95 1.489 2.208 | 3.262 4.801 7.040 10.29 14.97 21.72 31.41 45.26 93.05 188.9 1.645 2.692 4.384 7.107 11.47 18.42 29.46 46.90 74.36 117,4 289.0 700.2 15% 1.150 1.323 1.521 1.749 2.011 2.313 2.660 3.059 3.518 4.046 4.652 5.350 6.153 7.076 8.137 9.358 10.76 12.38 14.23 16.37 18.82 21.64 24.89 28.63 32.92 37.86 43.54 50.07 57.58 66.21 267.9 1,084 75.40 Print Done Calculate the ARR (accounting rate of return) for both plans. (Round your answers to the nearest tenth percent, X.X%.) Average annual operating income Average amount invested ARR Plan A Plan B Caclulate the NPV (net present value) of each plan. Begin by calculating the NPV of Plan A. (Complete all answer boxes. Enter a "0" for any zero balances or amounts that do not apply to the plan. Enter any factor amounts to three decimal places, X.XXX. Use parentheses or a minus sign for a negative net present value.) Net Cash Inflow Annuity PV Factor (i=8%, n=10) PV Factor (i=8%, n=10) Present Value Plan A: Years 1 - 10 10 Present value of annuity Present value of residual value Total PV of cash inflows 0 Initial Investment Net present value of Plan A Calculate the NPV of Plan B. (Complete all answer boxes. Enter a "0" for any zero balances or amounts that do not apply to the plan. Enter any factor amounts to three decimal places, X.XXX. Use parentheses or a minus sign for a negative net present value.) Net Cash Present Plan B: Years 1 - 10 Annuity PV Factor (i=8%, n=10) PV Factor (i=8%, n=10) Inflow Value 10 Present value of annuity Present value of residual value Total PV of cash inflows Initial Investment 0 Net present value of Plan B Calculate the profitability index of these two plans. (Round to two decimal places X.XX.) = Profitability index Plan A Plan B Requirement 2. What are the strengths and weaknesses of these capital budgeting methods? Match the term with the strengths and weaknesses listed for each of the four capital budgeting models. Capital Budgeting Method Strengths/Weaknesses of Capital Budgeting Method 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 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. It allows us to compare alternative investments in present value terms and it also accounts for differences in the investments' initial cost. It has none of the weaknesses of the other models. Choose from any drop-down list and then click Check Answer. Requirement 3. Which expansion plan should Lulus Company choose? Why? Lulus Company should invest in because it has a payback period, a ARR, a v net present value, and a profitability index. Click to select your answer(s) and then click Check Answer. Requirement 4. Estimate Plan A'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 8%