Save 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 $8,740,000. Expected annual net cash inflows are $1,450,000 with zero residual value at the end of ten years. Under Plan B, Cuppa would open three larger shops at a cost of $8,040,000. This plan is expected to generate net cash inflows of $1,000,000 per year for ten years, the estimated life of the properties. Estimated residual value is $1,025,000. Cuppa uses straight-line depreciation and requires an annual return of 6%. 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) 6.0 8.0 Now compute the ARR (accounting rate of return) for both plans. (Round the percentages to the nearest tenth percent.) Plan A Plan B 6.6 % 3.7 % 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 $ 1,932,000 (108,050)
Save 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 $8,740,000. Expected annual net cash inflows are $1,450,000 with zero residual value at the end of ten years. Under Plan B, Cuppa would open three larger shops at a cost of $8,040,000. This plan is expected to generate net cash inflows of $1,000,000 per year for ten years, the estimated life of the properties. Estimated residual value is $1,025,000. Cuppa uses straight-line depreciation and requires an annual return of 6%. 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) 6.0 8.0 Now compute the ARR (accounting rate of return) for both plans. (Round the percentages to the nearest tenth percent.) Plan A Plan B 6.6 % 3.7 % 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 $ 1,932,000 (108,050)
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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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 $8,740,000. Expected annual net cash inflows are $1,450,000 with zero residual
value at the end of ten years. Under Plan B, Cuppa would open three larger shops at a cost of $8,040,000. This plan
is expected to generate net cash inflows of $1,000,000 per year for ten years, the estimated life of the properties.
Estimated residual value is $1,025,000. Cuppa uses straight-line depreciation and requires an annual return of 6%.
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)
6.0
8.0
Now compute the ARR (accounting rate of return) for both plans. (Round the percentages to the nearest
tenth percent.)
Plan A
Plan B
6.6 %
3.7 %
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
$
1,932,000
(108,050)
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