Simply Chocolate is considering two possible expansion plans. Proposal X involve
ID: 2603602 • Letter: S
Question
Simply Chocolate is considering two possible expansion plans. Proposal X involves opening 5 stores in North Carolina at the cost of $2,400,000. Under Proposal Y, the company would focus on Virginia and open 6 stores at a cost of $3,000,000. The following information is given for the two proposals: Proposal X Proposal Y $2,400,000 $3,000,000 10 years 10 years Required investment Estimated life Estimated residual value $200,000 $200,000 Estimated annual cash over net 10 years $450,000$580,000 Required rate of return 14% 1, For each proposal, compute: A. Payback Period B. Net Present Value 2. Indicate which proposal is a better investment and why.Explanation / Answer
1.A.
Proposal X Proposal Y
Payback period : 5.33 years 5.17 years
1.B.
Proposal X Proposal Y
Net Present Value : 332,840 513,100
Net Present Value
2.
From the above results we can see that Proposal Y has lower payback period and also higher Net Present Value.
Therefore Proposal Y shall be accepted.
Payback period Proposal X Proposal Y Initial investment A 2400000 3000000 Annual cash flows B 450000 580000 Payback period (Years) (A/B) C 5.33 5.17 Payback period is the period within which the initial investment is recovered by the proposal.