You’ve decided to confirm your results from the average rate of return by using the cash payback method. Using the following table, compute the cash payback period of each investment. If required, round the number of years in the cash payback period to a whole number. Proposal Initial Cost Annual Net Cash Inflow Cash Payback Period in Years Alpha Beta Gamma
You’ve decided to confirm your results from the average rate of return by using the cash payback method. Using the following table, compute the cash payback period of each investment. If required, round the number of years in the cash payback period to a whole number. Proposal Initial Cost Annual Net Cash Inflow Cash Payback Period in Years Alpha Beta Gamma
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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HomeGrown Company is a chain of grocery stores that are similar to indoor farmer's markets, providing fresh, local produce, meats, and dairy products to consumers in urban areas. HomeGrown is considering opening several stores in a new city, and has proposals from three contractors (Alpha, Beta, and Gamma companies) who would like to provide buildings for the new stores.
The amount of expected revenue from the stores will depend on the design of the contractor. For example, if HomeGrown decides on a more open floor plan, with less shelf space for products, revenue would be lower overall. However, if HomeGrown decides on a very crowded floor plan, it may lose customers who appreciate a more open feel.
As the project manager for HomeGrown, you are responsible for deciding which if any of the proposals to accept. HomeGrown's minimum acceptable rate of return is 20%. You receive the following data from the three contractors:
|
Proposal
|
Type of Floor Plan
|
Initial Cost if Selected
|
Residual Value
|
| Alpha | Very open, like an indoor farmer’s market | $1,472,000 | $0.00 |
| Beta | Standard grocery shelving and layout, minimal aisle space | 5,678,900 | 0.00 |
| Gamma | Mix of open areas and shelving areas | 2,325,760 | 0.00 |
You have computed estimates of annual cash flows and average annual income from customers for each of the three contractors' plans. You believe that the annual cash flows will be equal for each of the 10 years for which you are preparing your capital investment analysis. Your conclusions are presented in the following table.
|
Proposal
|
Estimated Average
|
|
|
Annual Income
|
Estimated Average
|
|
|
(after
|
Annual Cash Flow
|
|
| Alpha | $324,134 | $351,145 |
| Beta | 286,217 | 461,411 |
| Gamma | 582,719 | 648,654 |
1. You’ve decided to confirm your results from the average rate of return by using the cash payback method.
Using the following table, compute the cash payback period of each investment. If required, round the number of years in the cash payback period to a whole number.
|
Proposal
|
Initial Cost
|
Annual Net
|
Cash Payback Period in Years
|
| Alpha |
|
|
|
| Beta |
|
|
|
| Gamma |
|
|
|
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