Reference no: EM132894831

Question - Tree city Inc. operates a chain of coffee shops. The company is considering two possible expansion plans. plan A would involve opening  eight smaller shops at a cost of $8,940,000. Expected annual net cash inflows are $1,600,000, with zero residual value at the end of ten years. Under plan B, tree city would open three larger shops at a cost of $8,540,000. 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 for plan B is $1,075,000. Tree city uses straight line depreciation and requires an annual return of 8%.

Requirements -

Compute the payback period, the ARR, and the NPV of these two plans. What are the strengths and weaknesses of capital budgeting models?

Which expansion plan should Tree City choose? Why?

Estimate Plan A's IRR. How does the IRR compare with the company's required rate of return?