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S3 lite u.edu e.m u/convery/ACC9620202%20FS15%20and%20beyond/CH962012%20Capital%20Budgeting/Problem%20129620-962061B.problema? symb Reade es k Med TBMRead ichigan Stat ty EC 202 LON-CAPA FS15 12-1. L Course Contents GRADED LON-CAPA Homework FS15 12-1 Timer Notes Evaluate Feedback Print Info Coffee-K Group operates a chain of coffee shops. The company is considering two possible expansion plans. Plan A would involve opening ten smaller shops at a cost of $8,750,000. Expected annual net cash inflows are $1,550,000, with zero residual value at the end of nine years. Under Plan B, Coffee-K would open four larger shops at a cost of $8,230,000. This plan is expected to generate net cash inflows of $1,050,000 per year for nine years, the estimated life of the properties. Estimated residual value for Plan B is $1,075,000. Coffee-K Group uses straight-line depreciation and requires an annual rate of return of 6%. Note: At 6% discount rate, the present value of annuity of $1 for 9 years is 6.802, and the present value of $1 for 9 years is 0.592 Answer the following questions. Each question is worth 1 point. 1. Compute payback period (round answers to one decimal place a. Compute payback period for Plan A b. Compute payback period for Plan B: Submit Answer Tries 0/10 2. Compute accounting rate of return (round answers to one decimal place a. Compute accounting rate of return for Plan A: b. Compute accounting rate of return for Plan B: Submit Answer Tries 0/10 For questions 3 and 4, enter as a positive if positive NPV and negative if negative NPV. 3. Compute net present value for Plan A (round answer to the nearest dollar): Submit Answer Tries 0/10 4. Compute net present value for Plan B (round answer to the nearest dollar): Submit Answer Tries 0/10 5. What is the Internal Rate of Return (IRR) for Project A? Hint: From the annuity PV factor obtained for project A, use the present value of annuity of $1 table to find the range of returns in which Project A's IRR falls into. Ascertain whether Pro ect A's IRR is greater or smaller than Coffee-K Group's required rate of return. Submit Answer Tries 0/10Explanation / Answer
1. Computation of payback period
Plan A = 5 years + [(8750000-7750000)/(9300000-7750000)]
= 5.64 years
Plan B = 7 years + [(8230000-7350000)/(8400000-7350000)]
= 7.84 years
2.
Accounting Rate of Return = Incremental accounting income / Initial Investment
Plan A = 1550000/8750000*100 = 17.71%
Plan B = 1050000/8230000*100 = 12.76%
3.
NPV = Present Value of Cash inflows - Initial Investment
Present Value of Cash inflows:
Plan A = (1550000*6.802) = $10543100
Plan B = (1050000*6.802) + (1075000*0.592) = $7778500
NPV : Plan A = 10543100-8750000 = $1793100
4. NPV: Plan B = 7778500-8230000 = -$451500
5. NPV of Plan A at discount rate of 15% = (1550000*4.772)-8750000 = -$1353400
IRR = Lower rate + [Lower rate NPV / (Lower rate NPV - Higher rate NPV)]*Difference in rates
= 6 + [1793100 / (1793100+1353400)]*9
= 11.13%
Plan A Plan B Initial Investment $8750000 $8230000 Expected Annual Cash flows $1550000 $1050000 Residual Value 0 $1075000 Tenure 9 years 9 years Annual rate of return 6% 6%Related Questions
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