Marcus & Tyler sells frozen custard and sandwiches. It is considering a new site that will require a $2 million investment for land acquisition and construction costs. The following operating results are expected:Sales Revenue?$980,000Less operating expenses:?? Food & Supplies$320,000? Wages & Salaries180,000? Insurance & Taxes40,000? Utilities10,000? Depreciation70,000620,000Operating income?$360,000Disregard income taxes.Required:A. If management requires a payback period of four years or less, should the new site be opened? Why?B. Compute the accounting rate of return on the initial investment.C. What significant limitation of payback and the accounting rate of return is overcome by the net-present-value method?
What will be an ideal response?
A. Annual net cash inflows: $980,000 ? ($620,000 ? $70,000) = $430,000
Payback: $2,000,000 ÷ $430,000 = 4.65 years
No, because the payback fails to meet management's guideline.
B. $360,000 ÷ $2,000,000 = 18%
C. Payback and the accounting rate of return ignore the time value of money, which is the foundation of the net-present-value method.
You might also like to view...
How would you represent consumer preferences for frozen foods as dummy variables if the respondents were classified as heavy, medium, light, nonusers?
What will be an ideal response?
Gift giving across cultures is a simple kindness and need not be complicated with attempts to understand. The act of generosity says everything in and of itself.
Answer the following statement true (T) or false (F)
Everything else equal, if a firm increases the dividend that it pays from $4 to $5:
A. more money will be available to invest in capital budgeting projects. B. its future growth rate will decrease. C. demand for the stock will decrease among investors who prefer to receive current income from their investments. D. the firm should expect many of the investors who held the stock prior to the increase to sell their stock E. its operating income will increase.
A hospital's layout most closely resembles which of the following?
A) product oriented B) work cell C) job shop D) project E) retail