Rocky & Road, which sells ice cream and frozen yoghurt, is considering a new site that will require a $4.2 million investment for land acquisition and construction costs. The following operating results are expected: $\begin{array}{l}

\text { Sales revenue } & & \$ 1,572,000 \
\text { Less operating expenses: } \
\text { Food \& supplies }& \$ 660,000 & \
\text { Wages \& salaries } & 320,000 & \
\text { Insurance \& taxes } & 80,000 & \
\text { Utilities } & 15,000 & \
\text { Depreciation } & \underline {70,000 }& \underline {1,075,000} \
\text { Operating income } & & \underline {\underline {\$ 497,000}}\
\
\text { Disregard income taxes. }\

\end{array}$ Required:
A. If management requires a payback period of three 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?

Question

Rocky & Road, which sells ice cream and frozen yoghurt, is considering a new site that will require a $4.2 million investment for land acquisition and construction costs. The following operating results are expected: $\begin{array}{l}

\text { Sales revenue } & & \$ 1,572,000 \
\text { Less operating expenses: }  \
\text { Food \& supplies }& \$ 660,000 & \
\text { Wages \& salaries } & 320,000 &  \
\text { Insurance \& taxes } & 80,000 & \
\text { Utilities } & 15,000 & \
 \text { Depreciation } & \underline {70,000 }& \underline {1,075,000}  \
\text { Operating income } & & \underline {\underline {\$ 497,000}}\
\
\text { Disregard income taxes. }\

\end{array}$ Required:
A. If management requires a payback period of three 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?

Quizplus · Accepted Answer

The Answer of Rocky & Road, which sells ice cream and frozen yoghurt, is considering a new site that will require a $4.2 million investment for land acquisition and construction costs. The following operating results are expected: $\begin{array}{l}

\text { Sales revenue } & & \$ 1,572,000 \
\text { Less operating expenses: }  \
\text { Food \& supplies }& \$ 660,000 & \
\text { Wages \& salaries } & 320,000 &  \
\text { Insurance \& taxes } & 80,000 & \
\text { Utilities } & 15,000 & \
 \text { Depreciation } & \underline {70,000 }& \underline {1,075,000}  \
\text { Operating income } & & \underline {\underline {\$ 497,000}}\
\
\text { Disregard income taxes. }\

\end{array}$ Required:
A. If management requires a payback period of three 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?

Rocky & Road, Which Sells Ice Cream and Frozen Yoghurt