Cuppa Inc. operates a chain of snack shops. The company is considering two possible expansion plans. Plan A would open eight smaller shops at a cost of $a8,940,000. Expected annual net cash.inflows are $1,700,000 with zero residual value at the end of ten years. Under Plan B, Cuppa would open three larger shops at a cost of $8,840,000. This plan is expected to generate net cash inflows of $1,400,000 per year for ten years, the estimated life of the properties. Estimated residual value is $900,000. Cuppa uses straight-line depreciation and requires an annual return of 10%. (Click the icon to view the present value annuity factor table.) E(Click the icon to view the present value factor table.) (Click the icon to view the future value annuity factor table.) (Click the icon to view the future value factor table.) Read the requirements.. 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)

Cuppa Inc. operates a chain of snack shops. The company is considering two possible expansion plans. Plan A would open eight smaller shops at a cost of $a8,940,000. Expected annual net cash.inflows are $1,700,000 with zero residual value at the end of ten years. Under Plan B, Cuppa would open three larger shops at a cost of $8,840,000. This plan is expected to generate net cash inflows of $1,400,000 per year for ten years, the estimated life of the properties. Estimated residual value is $900,000. Cuppa uses straight-line depreciation and requires an annual return of 10%. (Click the icon to view the present value annuity factor table.) E(Click the icon to view the present value factor table.) (Click the icon to view the future value annuity factor table.) (Click the icon to view the future value factor table.) Read the requirements.. 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)

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Oriole Corporation is considering adding a new product line. The cost of the factory and equipment to produce this product is $1,700,000. Company management expects net cash flows from the sale of this product to be $630,000 in each of the next eight years. If Oriole uses a discount rate of 11 percent for projects like this, what is the net present value of this project? (Round intermediate calculations to 5 decimal places, e.g. 0.42354. Round answer to O decimal places, e.g. 52.25. Enter negative amounts using negative sign e.g. -45.25.) NPV $ 36695.55 What is the internal rate of return? (Round answer to 2 decimal places, e.g. 52.50.) Internal rate of return %
Thunder Corporation, an amusement park, is considering a capital investment in a new exhibit. The exhibit would cost $204,969 and have an estimated useful life of 12 years. It can be sold for $69,200 at the end of that time. (Amusement parks need to rotate exhibits to keep people interested.) It is expected to increase net annual cash flows by $26,300. The company's borrowing rate is 8%. Its cost of capital is 10%. Click here to view the factor table. Calculate the net present value of this project to the company and determine whether the project is acceptable. (If the net present value is negative, use either a negative sign preceding the number eg-45 or parentheses eg (45). For calculation purposes, use 5 decimal places as displayed in the factor table provided. Round present value answer to O decimal places, eg. 125) Net present value $ The project SUPPO
Blossom, Inc., is considering investing in a new production line for eye drops. Other than investing in the equipment, the company needs to increase its cash and cash equivalents by $11,000, increase the level of inventory by $31,000, increase accounts receivable by $26,000, and increase accounts payable by $6,000 at the beginning of the project. Blossom will recover these changes in working capital at the end of the project 6 years later. Assume the appropriate discount rate is 8 percent. What are the present values of the relevant investment cash flows? (Do not round intermediate calculations. Round answer to 2 decimal places, e.g. 5,275.25.) Present value $
XYZ, which currently sells art products, is considering project Q, which would involve teaching art lessons For most of its existence, XYZ sold art products, taught art lessons, and painted murals Project Q Would require an initial investment of $87,300 today and is expected to produce annual cash flows of $10,200 each year forever with the first annual cash flow expected in 1 year What is the NPV of project Q. based on the information in this paragraph and the following table and applying the pure play approach to detemining a project's cost of capital? Firm XYZ Frisco Frescos NorCal Art Art Factory Line of business Sells art products Paints murals at residential and commercial sights Teaches art lessons Sells art products, teaches art lessons, & paints murals WACC 144 percent 82 percent 95 percent 77 percent O a. $20,068 (plus or minus $10) Ob. $144,518 (plus or minus $10) OC. $37,090 (plus or minus $10) O d. $45,168 (plus or minus $10) O e. None of the above is within $10 of the…
Folsom Advertising, Inc. is considering an investment in a new information system. The newsystem requires an investment of $1,800,000 and either has (a) even cash flows of $750,000 peryear or (b) the following expected annual cash flows: $450,000, $225,000, $600,000, $600,000,and $150,000.Required:Calculate the payback period for each case.
OTR Trucking Company runs a fleet of long-haul trucks and has recently expanded into the Midwest, where it has decided to build a maintenance facility. This project will require an initial cash outlay of 20 million and will generate annual cash inflows of $ 4.5 million per year for Years 1 through 3. In Year 4, the project will provide a net negative cash flow of $5 million due to anticipated expansion of and repairs to the facility. During Years 5 through 10, the project will provide cash inflows of 2 million per year. a. Calculate the project's NPV and IRR where the discount rate is 12 percent. Is the project a worthwhile investment based on these two measures? Why or why not?b. Calculate the project's MIRR. Is the project a worthwhile investment based on this measure? Why or why not?
A company has to make a decision about expanding its production facilities. Research indicates that the desired expansion would require an immediate outlay of $130,000 and an outlay of a further $20,000 in 3 years. The net cash returns are shown below. Find the net present value of the project. According to the net present value criterion, should the expansion project be undertaken if the required rate of return is 10%? Year 1 to Year 8 Year 9 to Year 12 $22,000 per year $18,000 per year The net present value of the expansion project is $ (Round the final answer to the nearest dollar as needed. Round all intermediate values to six decimal places as needed.)
Kwon Jewelers is evaluating a 1-year project that would involve an initial investment in equipment of $32,000 and an expected cash flow of $36,000 in 1 year. The project has a cost of capital of 8.36 percent and an internal rate of return of 12.50 percent. If Kwon Jewelers were to use $32,000 in cash from its bank account to purchase the equipment, the net present value of the project would be $1,222.59. However, Kwon Jewelers has no cash in its bank account, so using money from its account is not possible. Therefore, the firm would need to borrow money to raise the $32,000. If Kwon Jewelers were to borrow money to raise the $32,000, the interest rate on the loan would be 13.47 percent. Kwon Jewelers would receive $32,000 at the start of the project and would pay $36,310 one year later. What is the NPV of the project if Kwon Jewelers borrows $32,000 to pay for the project? $1,222.59 (plus or minus 3 dollars) $0.00 (plus or minus 3 dollars) $-273.55 (plus or minus 3 dollars) $1,509.04…
United Pigpen is considering a proposal to manufacture high-protein hog feed. The project would require use of an existing warehouse, which is currently rented out to a neighboring firm. The next year's rental charge on the warehouse is $120,000, and thereafter, the rent is expected to grow in line with inflation at 4% a year. In addition to using the warehouse, the proposal envisages an investment in plant and equipment of $1.32 million. This could be depreciated for tax purposes straight-line over 10 years. However, Pigpen expects to terminate the project at the end of 8 years and to resell the plant and equipment in year 8 for $440,000. Finally, the project requires an immediate investment in working capital of $370,000. Thereafter, working capital is forecasted to be 10% of sales in each of years 1 through 7. Working capital will be run down to zero in year 8 when the project shuts down. Year 1 sales of hog feed are expected to be $4.60 million, and thereafter, sales are forecasted…
Melton Manufacturing Ltd is considering two alternative investment projects. The first project calls for amajor renovation of the company’s manufacturing facility. The second involves replacing just a fewobsolete pieces of equipment in the facility. The company will choose one project or the other this year,but it will not do both. The cash flows associated with each project appear below and the firm discountsproject cash flows at 10%.Year Renovate Replace0 –$4,000,000 –$1,300,0001 2,000,000 1,000,0002 2,000,000 700,0003 2,000,000 300,0004 2,000,000 150,0005 2,000,000 150,000 Chart the NPV profiles of these projects. Label the intersection points on the x- and y-axes and thecrossover point.
Haresh
Bensington Glass Co. is considering the expansion of it spandrel glass business line. They plan to convert an unused space of their warehouse into additional manufacturing space. They estimate the initial investment will be $7,450,000 and expect the new production to create additional cash flows of $2,925,000 in year's one through ten. If Bensington Glass uses a discount rate of 11%, what is the project's discounted payback period? 4.00 O 3.00 O 3.82 3.16

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