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    Payback, NPV, Accounting rate-of-return -Bob's Big Burgers

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    Bob's Big Burgers is considering a proposal to invest in a speaker system that would allow its employees to service drive-through customers. The cost of the system (including installation of special windows and driveway modifications) is $30,000. Jenna Simon, manager of Bob's, expects the drive-through operations to increase annual sales by $25,000, with a 40% contribution margin ratio. Assume that the system has an economic life of six years, at which time it will have no disposal value. The required rate of return is 12%. Ignore taxes.

    1) Compute the payback period. Is this a good measure of profitability?
    2) Compute the NPV. Should Simon accept the proposal? Why or why not?
    3) Using the accounting rate-of-return model, compute the rate of return in the initial investment.

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    Solution Preview

    Bob's Big Burgers is considering a proposal to invest in a speaker system that would allow its employees to service drive-through customers. The cost of the system (including installation of special windows and driveway modifications) is $30,000. Jenna Simon, manager of Bob's, expects the drive-through operations to increase annual sales by $25,000, with a 40% contribution margin ratio. Assume that the system has an economic life of six years, at which time it will have no disposal value. The required rate of return is 12%. Ignore taxes.

    1) Compute the payback period. Is this a good ...

    Solution Summary

    The NPV, Payback period and accounting rate-of-return of an investment in speaker system have been calculated.

    $2.19