Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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Mugs Inc. operates a chain of doughnut shops. The company is considering two possible expansion plans. Plan A would open eight smaller shops at a cost of $8,340,000. Expected annual net cash inflows are $1,500,000 with zero residual value at the end of ten years. Under
Plan B, Mugs would open three larger shops at a cost of $8,140,000. This plan is expected to generate net cash inflows of $1,150,000 per year for ten years, the estimated life of the properties. Estimated residual value is $975,000. Mugs uses straight-line depreciation and
requires an annual return of 8%.
(Click the icon to view the present value annuity factor table.)
F(Click the icon to view the future value annuity factor table.)
Read the requirements.
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 Mugs choose? Why?
(Click the icon to view the present value factor table.)
(Click the icon to view the future value factor table.)
3. Estimate Plan A's IRR. How does the IRR compare with the company's
required rate of return?
Print
Done
X
strengths and weaknesses of these capital budgeting models?
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Transcribed Image Text:Mugs Inc. operates a chain of doughnut shops. The company is considering two possible expansion plans. Plan A would open eight smaller shops at a cost of $8,340,000. Expected annual net cash inflows are $1,500,000 with zero residual value at the end of ten years. Under Plan B, Mugs would open three larger shops at a cost of $8,140,000. This plan is expected to generate net cash inflows of $1,150,000 per year for ten years, the estimated life of the properties. Estimated residual value is $975,000. Mugs uses straight-line depreciation and requires an annual return of 8%. (Click the icon to view the present value annuity factor table.) F(Click the icon to view the future value annuity factor table.) Read the requirements. 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 Mugs choose? Why? (Click the icon to view the present value factor table.) (Click the icon to view the future value factor table.) 3. Estimate Plan A's IRR. How does the IRR compare with the company's required rate of return? Print Done X strengths and weaknesses of these capital budgeting models?
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