Accounting Rate of Return Coffee-K Group operates a chain of coffee shops. The c

Question

Accounting Rate of Return

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 $8,570,000. 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 $8,010,000. 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%.

Enter as a positive if positive NPV and negative if negative NPV.

a. Compute net present value for Plan A (round answer to the nearest dollar):

b. Compute net present value for Plan B (round answer to the nearest dollar):

Explanation / Answer

Computation of Net present value

Years Plan A Discount@6% PV cash inflows Plan B PV cash inflows

1 1550000 0.943 1461650 1050000 990150

2 1550000 0.890 1379500 1050000 934500

3 1550000 0.840 1302000 1050000 882000

4 1550000 0.792 1227600 1050000 831600

5 1550000 0.747 1157850 1050000 784350

6 1550000 0.705 1092750 1050000 740250

7 1550000 0.665 1030750 1050000 698250

8 1550000 0.627 971850 1050000 658350

9 1550000 0.592 917600 1050000 621600

total PV cash flows 10541550 7141050

less: initial investment (8570000) (8010000)

NPV 1971550 (868950)

a. Plan A has positive NPV is 1971550

b. Plan B has negative NPV is (868950).

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