Concept explainers
Using payback, APR,
Learning Objectives 2,4
- Plan A 1.39 profitability index; Plan B $(187,580) NPV
Howard Company 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 $8,500,000. Expected annual net
Requirements
- Compute the payback, the ARR, the NPV, and the profitability index of these two plans.
- What are the strengths and weaknesses of these capital budgeting methods?
- Which expansion plan should Howard Company choose? Why?
- Estimate Plan A's IRR. How does the IRR compare with the company's required
rate of return ?
Trending nowThis is a popular solution!
Chapter 26 Solutions
Horngren's Accounting, The Financial Chapters (12th Edition)
- Give typing answer with explanation and conclusion Singing Fish Fine Foods is considering two potential projects for the funds. Each will cost $2,000,000 for capital investments. Project 1 is updating the deli section of the store for additional food service. The estimated annual after-tax cash flow of this project is $600,000 per year for the next five years. Project 2 is updating the store’s wine section. The estimated annual after-tax cash flow for this project is $530,000 for the next six years. The appropriate discount rate for the deli expansion is 9.5% and the appropriate discount rate for the wine section is 9.0%. If the two projects are independent, use the NPV to determine which project(s) Singing Fish should choose for the store. Question 1: For each project, adjust the NPV for unequal lives with the equivalent annual annuity. Enter the highest equivalent annuity payment.arrow_forwardManager Cafe "Blue Sky" is considering investing 2 (two) projects. Project X is an investment of $ 75,000 to replace a working but outdated cooling equipment. Project Y is a $ 1,500,000 investment to expand the dining facilities. Relevant cash flow data for the two projects over the expected 2 years are as follows: Project X Year 1 Year 2 Probability Cash Flow Probability Cash Flow 0.16 $0 0.08 $0 0.66 $50000 0.82 $50000 0.18 $100000 0.10 $100000 Project Y Year 1 Year 2 Probability Cash Flow Probability Cash Flow 0.50 $0 0.13 $0 0.50 $200000 0.74 $100000 0.13 $200000 Calculate: IRR for each project, and rank the projects according to the IRR criteria.arrow_forwardManager Cafe "Blue Sky" is considering investing 2 (two) projects. Project X is an investment of $ 75,000 to replace a working but outdated cooling equipment. Project Y is a $ 1,500,000 investment to expand the dining facilities. Relevant cash flow data for the two projects over the expected 2 years are as follows: Project X Year 1 Year 2 Probability Cash Flow Probability Cash Flow 0.16 $0 0.08 $0 0.66 $50000 0.82 $50000 0.18 $100000 0.10 $100000 Project Y Year 1 Year 2 Probability Cash Flow Probability Cash Flow 0.50 $0 0.13 $0 0.50 $200000 0.74 $100000 0.13 $200000 Calculate: Expected value, standard deviation, and coefficient of variation for cash flows from each project. Compute: Risk-adjusted NPV for each project using a cost of capital of 15% for riskier projects, and 12%…arrow_forward
- Manager Cafe "Blue Sky" is considering investing 2 (two) projects. Project X is an investment of $ 75,000 to replace a working but outdated cooling equipment. Project Y is a $ 1,500,000 investment to expand the dining facilities. Relevant cash flow data for the two projects over the expected 2 years are as follows: Project X Year 1 Year 2 Probability Cash Flow Probability Cash Flow 0.16 $0 0.08 $0 0.66 $50000 0.82 $50000 0.18 $100000 0.10 $100000 Project Y Year 1 Year 2 Probability Cash Flow Probability Cash Flow 0.50 $0 0.13 $0 0.50 $200000 0.74 $100000 0.13 $200000 Calculate: Expected value, standard deviation, and coefficient of variation for cash flows from each project. Compute: Risk-adjusted NPV for each project using a cost of capital of 15% for riskier projects, and 12% cost of capital for less risky projects. Which project is more…arrow_forwardSUBJECT: ENGINEERING ECONOMICS INSTRUCTION: Answer the following questions by including the appropriate cash flow diagrams, solution, and final answer. 1. You are planning to save enough money to buy a brand new car five years from now. You are setting a budget of Php 1,000,000 for this purchase. Your plan is to accumulate the amount by making three savings deposits at an interest rate of 10%. Deposit 1: Deposit Php 100,000 today, Deposit 2: Deposit Php 150,000 two years from now, Deposit 3: Deposit an amount Php X three years from now. How much do you need to invest in year three to ensure that you have the necessary fund to buy the new car at the end of year five?arrow_forwarduse excel to answer A land for farming has been purchased for $220,000. The annual profits for 7 years of farming is expected to be $55000. The land is expected to have a salvage cost of $130,000 at the end of the 7th year. Calculate the internal rate of return and highlight it in yellow. Also, calculate the modified internal rate of return and highlight it in yellow. Assume borrowing (financing) rate of 8% and investing (reinvesting) rate of 12%.arrow_forward
- Consider how Steinback Valley River Park Lodge could use capital budgeting to decide whether the $12,000,000 River Park Lodge expansion would be a good investment. Assume Steinback Valley's managers developed the following estimates concerning the expansion: 1(Click the icon to view the estimates.) Read the requirements2. Requirement 1. Compute the average annual net cash inflow from the expansion. The average annual net cash inflow from the expansion is Requirement 2. Compute the average annual operating income from the expansion. The average annual operating income from the expansion is 1: Data Table Number of additional skiers per day 119 skiers Average number of days per year that weather conditions allow skiing at Steinback Valley 151 days Useful life of expansion (in years) 8 years Average cash spent by each skier per day $244 Average variable cost of serving each skier per day 78 Cost…arrow_forwardToby Amberville’s Manhattan Café, Inc., is considering investment in two alternative capital budgeting projects. Project A is an investment of $75,000 to replace working but obsolete refrigeration equipment. Project B is an investment of $150,000 to expand dining roomfacilities.Relevant cash flowdata forthe two projects over their expected two-year lives are: Project A year 1 year 2 probability cash flow probability cash flow 0.18 0 $ 0.08 0 $ 0.64 50,000 $ 0.084 50,000 0.18 100,000 0.08 100,00 Project B year 1 year 2 probability cash flow probability cash flow 0.50 0 $ 0.125 0 $ 0.50 200,000 0.75 100,000 0.125 200,000 A. Calculate the expected value, standard deviation, and coefficient of variation for cash flows from each project. B. Calculate the risk-adjusted NPV for each project using a 15% cost of capital for the riskier project and a 12% cost of capital for the less risky one. Which project is preferred…arrow_forwardUse Excel to solve the following problem. Assume that as a local government financial analyst you are asked to project the feasibility of a loan to a proposed public service venture for its start-up funding. The venture’s principals estimate that, at the end of 5 years, they will be able to pay back up to $800,000 from revenues accruing to the venture’s activities. Assuming that your organization’s current “average cost of capital” is 4.8% (the “discount rate”). Assuming monthly compounding, what is the maximum amount your government can commit to the venture for its start-up? (I have worked this problem out on my own, I just want to be sure I used the correct formulas.)arrow_forward
- MGMT2023 - Financial Management 1-UWI Open Campus Stephanie Carter has been gifted a sum of $50,000 by her grandparents on completing her graduation successfully. She is a fresh finance graduate and is excited to invest some money in the capital market, for which she intends to use the gifted sum of $50,000. However, instead of committing this money to the market immediately, she decides to wait for some time, work in the field and acquire some experience before proceeding with her intended investment. She thus contemplates an extremely conservative investment in a portfolio of stocks and bonds, at the start of year 5 from now. For now, she will leave the $50,000 in a fixed deposit with the bank which promises an interest rate of 6% per annum. She will require a return of at least 9% on her stock investments and 4% on bond investments. Stephanie would have to pay 25% taxes on any interest income. Dividends will be tax-free. Stephanie's research has allowed her to narrow down on the…arrow_forwardYour company is planning to purchase a new log splitter for is lawn and garden business. The new splitter has an initial investment of $180,000. It is expected to generate $25,000 of annual cash flows, provide incremental cash revenues of $150,000, and incur incremental cash expenses of $100,000 annually. What is the payback period and accounting rate of return (ARR)?arrow_forwardYou are asked to evaluate the following two projects for the Norton corporation. Use a discount rate of 14 percent. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods. Project X (Videotapesof the Weather Report)($20,000 Investment) Project Y (Slow-MotionReplays of Commercials)($40,000 Investment) Year Cash Flow Year Cash Flow 1 $ 10,000 1 $ 20,000 2 8,000 2 13,000 3 9,000 3 14,000 4 8,600 4 16,000 a. Calculate the profitability index for project X. b. Calculate the profitability index for project Y.arrow_forward
- Managerial AccountingAccountingISBN:9781337912020Author:Carl Warren, Ph.d. Cma William B. TaylerPublisher:South-Western College PubSurvey of Accounting (Accounting I)AccountingISBN:9781305961883Author:Carl WarrenPublisher:Cengage LearningPrinciples of Accounting Volume 2AccountingISBN:9781947172609Author:OpenStaxPublisher:OpenStax College