Leslies 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 $8,400,000. Expected annual net cash inflows are $1,500,000, with zero residual value at the end of 10 years. Under Plan B, Leslies would open three larger shops at a cost of $8,250,000. This plan is expected to generate net cash inflows of $1,800,000 per year for 10 years, the estimated useful life of the properties. Leslies requires an annual return of 10%. In order to get credit for the answers provided, you must show all your work, how you arrived at the answer provided for each question:
a. Compute the payback period, the NPV & ARR for these two plans.
b. Describe the strengths and weaknesses of each capital budgeting techniques in this case.
c. Which expansion plan should Leslies choose? Why?
d. Estimate Plan A’s IRR. How does the IRR compare with the company’s required rate of return?