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.) (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? (Click the icon to view the present value factor table.) (Click the icon to view the future value factor table.) 2. Which expansion plan should Mugs choose? Why? 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?
Net Present Value
Net present value is the most important concept of finance. It is used to evaluate the investment and financing decisions that involve cash flows occurring over multiple periods. The difference between the present value of cash inflow and cash outflow is termed as net present value (NPV). It is used for capital budgeting and investment planning. It is also used to compare similar investment alternatives.
Investment Decision
The term investment refers to allocating money with the intention of getting positive returns in the future period. For example, an asset would be acquired with the motive of generating income by selling the asset when there is a price increase.
Factors That Complicate Capital Investment Analysis
Capital investment analysis is a way of the budgeting process that companies and the government use to evaluate the profitability of the investment that has been done for the long term. This can include the evaluation of fixed assets such as machinery, equipment, etc.
Capital Budgeting
Capital budgeting is a decision-making process whereby long-term investments is evaluated and selected based on whether such investment is worth pursuing in future or not. It plays an important role in financial decision-making as it impacts the profitability of the business in the long term. The benefits of capital budgeting may be in the form of increased revenue or reduction in cost. The capital budgeting decisions include replacing or rebuilding of the fixed assets, addition of an asset. These long-term investment decisions involve a large number of funds and are irreversible because the market for the second-hand asset may be difficult to find and will have an effect over long-time spam. A right decision can yield favorable returns on the other hand a wrong decision may have an effect on the sustainability of the firm. Capital budgeting helps businesses to understand risks that are involved in undertaking capital investment. It also enables them to choose the option which generates the best return by applying the various capital budgeting techniques.
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