Question

Has Beans Inc. operates a chain of lunch 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 $1,650,000 with zero residual value at the end of ten years. Under Plan? B, Has Beans would open three larger shops at a cost of $ 8,540,000. This plan is expected to generate net cash inflows of $1,050,000 per year for ten ?years, the estimated life of the properties. Estimated residual value is $ 900,000. Has Beans uses? straight-line depreciation and requires an annual return of 10?%.

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? Plan A = 5.3 years Plan B = 8.1 years
2.	Which expansion plan should Has Beans choose? Why?
3.	Estimate Plan? A's IRR. How does the IRR compare with the? company's required rate of? return?

Answer 1

Calculate the NPV, Payback period and ARR and IRR as follows:.

Formulas:

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Strengths and Weakness: