Williams Department Stores is considering two possible expansion plans.One proposal involves opening 5 stores in Indiana at the cost of $1,800,000.Under the other proposal,the company would focus on Kentucky and open 6 stores at a cost of $2,400,000.The following information is available: $$\begin{array} { | l | l | l | }
\hline & \text { Indiana proposal } & \text { Kentucky proposal } \
\hline \text { Required investment } & \$ 1,800,000 & \$ 2,400,000 \
\hline \text { Estimated life } & 10 \text { years } & 10 \text { years } \
\hline \text { Estimated residual value } & \$ 50,000 & \$ 80,000 \
\hline \begin{array} { l }
\text { Estimated annual cash inflows over } \
\text { the next 10 years }
\end{array} & \$ 400,000 & \$ 500,000 \
\hline \text { Required rate of return } & 10 \% &10\% \
\hline
\end{array}$$
-The payback period for the Kentucky proposal is closest to:

Question

Williams Department Stores is considering two possible expansion plans.One proposal involves opening 5 stores in Indiana at the cost of $1,800,000.Under the other proposal,the company would focus on Kentucky and open 6 stores at a cost of $2,400,000.The following information is available: $$\begin{array} { | l | l | l | } 
\hline & \text { Indiana proposal } & \text { Kentucky proposal } \
\hline \text { Required investment } & \$ 1,800,000 & \$ 2,400,000 \
\hline \text { Estimated life } & 10 \text { years } & 10 \text { years } \
\hline \text { Estimated residual value } & \$ 50,000 & \$ 80,000 \
\hline \begin{array} { l } 
\text { Estimated annual cash inflows over } \
\text { the next 10 years }
\end{array} & \$ 400,000 & \$ 500,000 \
\hline \text { Required rate of return } & 10 \% &10\% \
\hline
\end{array}$$ 
-The payback period for the Kentucky proposal is closest to:

Quizplus · Accepted Answer

To calculate the payback period, we need to divide the initial investment by the expected annual cash flow. Let's calculate for both proposals:

For the Indiana proposal:
Initial investment = $1,800,000
Expected annual cash flow = $450,000 (5 stores x $90,000 per store)
Payback period = $1,800,000/$450,000 = 4 years

For the Kentucky proposal:
Initial investment = $2,400,000
Expected annual cash flow = $500,000 (6 stores x $83,333 per store)
Payback period = $2,400,000/$500,000 = 4.8 years

Therefore, the Kentucky proposal has a shorter payback period, making it the better choice.

Williams Department Stores Is Considering Two Possible Expansion Plans -The Payback Period for the Kentucky Proposal Is Closest To