Simply Chocolate Company is considering two possible expansion plans.Proposal X involves opening five stores in North...

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Simply Chocolate Company is considering two possible expansionplans.Proposal X involves opening five stores in North Carolina ata cost of $2,400,000. Under Proposal Y, the company would focus onVirginia and open six stores at a cost of $3,000,000. The followinginformation is given for the two proposals:

                                                                          ProposalX          Proposal Y
Requiredinvestment                                     $2,400,000        $3,000,000
Estimatedlife                                                  10years             10 years
Estimated residualvalue                                 $200,000             $200,000
Estimated annual net cashflows                       $450,000            $580,000
Required rate ofreturn                                      14%                     14%
Based on the above following problem,
Required: for each proposal, you are asked tocalculate
a.Pay back Period
b.Accounting Rate of Return
c.Net Present Value
d.Profitability Index
3.Indicate which proposal is the better investment.

Answer & Explanation Solved by verified expert

4.1 Ratings (863 Votes)

Payback period
	X	Y
Investment	2400000	3000000
Divide: Annual cashflows	450000	580000
Payback period	5.33	5.17	years

Accounting rate off return:
	X	Y
Cashflows	450000	580000
Less: Dep	220000	280000
Net Income	230000	300000
Divide: Average investment	1300000	1600000
Accounting rate of return	17.69%	18.75%

NPV:
	X	Y
Annual cashflows	450000	580000
Multiply: Annuity PVF	5.21612	5.21612
PV of cashflows	2347254	3025350
PV of salvage	53948.8	53948.8
Total PV of inflows	2401203	3079298
Less: Investment	2400000	3000000
NPV	1202.8	79298.4

Profitability index
	X	Y
PV of inflows	2401203	3079298
Divide: Investment	2400000	3000000
PI of project	1	1.03

Hence, in all respect, Project Y shall be accepted

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Transcribed Image Text

Simply Chocolate Company is considering two possible expansionplans.Proposal X involves opening five stores in North Carolina ata cost of $2,400,000. Under Proposal Y, the company would focus onVirginia and open six stores at a cost of $3,000,000. The followinginformation is given for the two proposals: ProposalX Proposal YRequiredinvestment $2,400,000 $3,000,000Estimatedlife 10years 10 yearsEstimated residualvalue $200,000 $200,000Estimated annual net cashflows $450,000 $580,000Required rate ofreturn 14% 14%Based on the above following problem,Required: for each proposal, you are asked tocalculatea.Pay back Periodb.Accounting Rate of Returnc.Net Present Value d.Profitability Index3.Indicate which proposal is the better investment.