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:

Disregard 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?

Question

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:
  
Disregard 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?

Quizplus · Accepted Answer

The Answer of 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:
  
Disregard 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?

Marcus & Tyler Sells Frozen Custard and Sandwiches