Reference no: EM132604117

Custard Treats, which sells frozen custard and sandwiches, is considering a new site that will require a $1 million investment for land acquisition and construction costs. The following operating results are expected:

Sales revenue                              $620,000

Less operating expenses:

Food & supplies                            $210,000

Wages & salaries                            180,000

Insurance & taxes                           20,000

Utilities                                         10,000

Depreciation                                   50,000

                                                    470,000

Operating income                            $150,000

Disregard income taxes.

Required:

Question A. If management requires a payback period of four years or less, should the new site be opened? Why?

Question B. Compute the accounting rate of return on the initial investment.

Question C. What significant limitation of payback and the accounting rate of return is overcome by the net-present-value method?