Question

Marengo is a popular restaurant located in Chilton Resort. Management feels that enlarging the facility to incorporate a large outdoor seating area will enable Marengo to continue to attract existing customers as well as handle large banquet parties that now must be turned away. Two proposals are currently under consideration. Proposal A involves a temporary walled structure and umbrellas used for sun protection; Proposal B entails a more permanent structure with a full awning cover for use even in inclement weather. Although the useful life of each alternative is estimated to be 10 years, Proposal
B results in higher salvage value due to the awning protection. The accounting department of Chilton
Resort and the manager of Marengo have assembled the following data regarding the two proposals:



Instructions
a. For each proposal, compute the (1) payback period, (2) return on average investment, and (3) net present value, discounted at management’s required rate of return of 15 percent. (Round the payback period to the nearest tenth of a year and the return on investment to the nearest tenth of a percent.) Use Exhibits 26–3 and 26–4 where necessary.
b. On the basis of your analysis in part a, state which proposal you would recommend and explain the reasons for your choice.
In Exhibits 26–3


In Exhibits26–4


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  • CreatedApril 17, 2014
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