NPV part 5 or so

# NPV part 5 or so - This material is produced by the SI...

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This material is produced by the SI Program at Arizona State University student success .asu.edu { collaborative peer-led structured group study SI Frank operates a chain of sub shops. The company is considering two possible expansion plans. Plan A would open eight smaller shops at a cost of \$8,840,000. Expected annual cash inflows are \$1,600,000, with zero residual value at the end of 9 years. Under Plan B, Frank would open 3 larger shops at a cost of \$8,240,000. This plan is expected to generate net cash inflows of \$1,250,000 per year for 9 years, the estimated life of the properties. Estimated residual value for plan B is \$1,125,000. Frank uses straight-line depreciation and requires an annual return of 8%, and the annual tax rate is 40%. 1) Compute the payback period, the ARR, and the NPV of these two plans. 2) Estimate Plan A’s IRR, how does it compare with the company’s required rate of return?

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Unformatted text preview: This material is produced by the SI Program at Arizona State University student success .asu.edu { collaborative peer-led structured group study SI Assume that Cherry Valley’s managers developed the following estimates concerning the expansion (all numbers assumed): Number of additional skiers per day 122 Average number of days per year that weather conditions allow skiing at Cherry Valley 162 Useful life of the expansion in years 9 Average Cash spent by each skier per day \$245 Average variable cost of serving each skier per day \$135 Cost of expansion \$10,000,000 Discount rate 10% Tax Rate 40% Assume that Cherry valley uses the straight-line depreciation method and expects the lodge expansion to have a residual value of \$950,000 at the end of it’s nine year life. 1) Compute the Payback Period and the ARR 2) Calculate the project’s NPV....
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NPV part 5 or so - This material is produced by the SI...

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