Cuppa Inc. operates a chain of snack shops. The company is considering two possible expansion plans. Plan A would open eight smaller shops at a cost of $8,940,000. Expected annual net cash inflows are $1,700,000 with zero residual value at the
end of ten years. Under Plan B, Cuppa would open three larger shops at a cost of $8,840,000. This plan is expected to
generate net cash inflows of $1,400,000 per year for ten years, the estimated life of the properties. Estimated residual value
is $900,000. Cuppa uses straight-line depreciation and requires an annual return of 10%.
(Click the icon to view the present value annuity factor table.) (Click the icon to view the present value factor
table.)
(Click the icon to view the future value annuity factor table.) (Click the icon to view the future value factor
table.)
Read the requirements.
Requirement 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?
Begin by computing the payback period for both plans. (Round your answers to one decimal place.)
Plan A (in years)
I
Plan B (in years)