Southern Chicken is considering two projects. Project A consists of creating an outdoor eating area on the unused portion of the restaurant's property. Project B would use that outdoor space for creating a drive-thru service window. When trying to decide which project to accept, the firm should rely most heavily on which one of the following analytical methods?
A) Profitability index
B) Internal rate of return
C) Payback
D) Net present value
E) Accounting rate of return

Question

Southern Chicken is considering two projects. Project A consists of creating an outdoor eating area on the unused portion of the restaurant's property. Project B would use that outdoor space for creating a drive-thru service window. When trying to decide which project to accept, the firm should rely most heavily on which one of the following analytical methods? 
A) Profitability index 
B) Internal rate of return 
C) Payback 
D) Net present value 
E) Accounting rate of return

Quizplus · Accepted Answer

The best analytical method in this case would be net present value (NPV), as both projects involve investing in the restaurant's property and would likely have long-term financial implications. NPV takes into account the time value of money and calculates the present value of future cash flows, which is a better indicator of the project's true profitability than other methods such as payback or accounting rate of return. Profitability index and internal rate of return (IRR) could also be used, but NPV is typically considered to be more accurate and reliable.

Southern Chicken Is Considering Two Projects