Help with Managerial Accounting? Hello, can someone help me solve this problem a

Question

Help with Managerial Accounting?

Hello, can someone help me solve this problem and possibly explain? I'm studying for an upcoming exam. Thanks in advance!

P12-57A P12-57A Compare investments with di Compare investments with different cash flows and residual values Learning Objectives 2 & 4) Carvers operates a chain of sandwich shops. The company is considering two possible expansion plans. Plan A would open eight smaller shops at a cost of $8,440,000 Expected annual net cash inflows are $1,600,000 with zero residual value at the end of nine years. Under Plan B, Carvers would open three larger shops at a cost of $8,240,000 This plan is expected to generate net cash inflows of $1,250,000 per year for nine years, the estimated life of the properties. Estimated residual value is $1,100,000. Carvers uses straight-line depreciation and requires an annual return of 10% Requirements 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? 2. Which expansion plan should Carvers choose? Why? 3. Estimate Plan A's IRR. How does the IRR compare with the company's required rate of return?

Explanation / Answer

Pay back period of A =Initial investment/Annual cash flow=8,440,000/1,600,000=5.275years

Pay back period of B =Initial investment/Annual cash flow=8,240,000/1,250,000=6.592years

ARR of A:

Annual Depreciation = (Initial Investment Scrap Value) ÷ Useful Life in Years
Annual Depreciation = ($8,440,000 $0) ÷ 9 $937,778
Average Accounting Income = $1,600,000 $937,778 = $662222

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