Snuffy’s Drive-In is considering a proposal to invest in a speaker system that would allow its employees to service drive-through customers. The cost of the system (including installation of special windows and driveway modifications) is $28,000. Brad Board, manager of Snuffy’s, expects the drive-through operations to increase annual sales by $14,000, with a 25% contribution margin ratio. Assume that the system has an economic life of 10 years, at which time it will have no disposal value. The required rate of return is 10%. Ignore taxes.
1. Compute the payback period. Is this a good measure of profitability?
2. Compute the NPV. Should Brad Board accept the proposal? Why or why not?
3. Using the ARR model, compute the rate of return on the initial investment.