4. DivisionD is considering possibi expan Ime al d cost of $8,700,000. Expected annual net cash inflows are $1,625,000, with zero residual value at the end of 10 years. Under Plan B, Division D would begin producing a new product at a cost of $8,240,000. This plan is expected to generate net cash inflows of $1,090,000 per year for 10 estimated useful life of the product line. Estimated residual value for Plan B is $1,100,000. Division D uses straight-line depreciation and requires an annual return of 10%. a. Compute the payback, the ARR, the NPV, and the profitability index for both plans. b. Compute the estimated IRR of Plan A. years, the
4. DivisionD is considering possibi expan Ime al d cost of $8,700,000. Expected annual net cash inflows are $1,625,000, with zero residual value at the end of 10 years. Under Plan B, Division D would begin producing a new product at a cost of $8,240,000. This plan is expected to generate net cash inflows of $1,090,000 per year for 10 estimated useful life of the product line. Estimated residual value for Plan B is $1,100,000. Division D uses straight-line depreciation and requires an annual return of 10%. a. Compute the payback, the ARR, the NPV, and the profitability index for both plans. b. Compute the estimated IRR of Plan A. years, the
Chapter10: Capital Budgeting: Decision Criteria And Real Option
Section10.A: Mutually Exclusive Investments Having Unequal Lives
Problem 2P
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Transcribed Image Text:4. Division D is considering two possible expansion plans. Plan A would expand a current product line at a
cost of $8,700,000. Expected annual net cash inflows are $1,625,000, with zero residual value at the
end of 10 years. Under Plan B, Division D would begin producing a new product at a cost of
$8,240,000. This plan is expected to generate net cash inflows of $1,090,000 per year for 10 years, the
estimated useful life of the product line. Estimated residual value for Plan B is $1,100,000. Division D
uses straight-line depreciation and requires an annual return of 10%.
Compute the payback, the ARR, the NPV, and the profitability index for both plans.
a.
b. Compute the estimated IRR of Plan A
Use Excel to verify the NPV calculations in Requirement 4(a) and the actual IRR for the two plans.
How does the IRR of each plan compare with the company's required rate of return?
d. Division D must rank the plans and make a recommendation to Dennison's top management team
for the best plan. Which expansion plan should Division D choose? Why?
C.
S.
Transcribed Image Text:Requirement 4. Division D is considering two possible expansion plans. Plan A would expand a current product line at a cost of $8,700,000. Expected annual net cash inflows are $1,625,000, with zero residual value at the end of
10 years. Under Plan B, Division D would begin producing a new product at a cost of $8,240,000. This plan is expected to generate net cash inflows of $1,090,000 per year for 10 years, the estimated useful life of the product line.
Estimated residual value for Plan B is $1,100,000. Division D uses straight-line depreciation and requires an annual return of 10%.
4a. Compute the payback, the ARR, the NPV, and the profitability index for both plans.
Begin by calculating the payback for both plans. (Round your answers to one decimal place, XX)
Payback
Plan A
years
Plan B
years
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