Simply Chocolate is considering two possible expansion plans

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.

Solution

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.