Walter Adam is the manager of the Springs Caf. The caf has decided to add pizza to

Question:

Walter Adam is the manager of the Springs Café. The café has decided to add pizza to its menu. The estimated equipment costs, incremental revenues from pizza sales, and incremental cash expenses related to the sales are as follows:

1. Cost of equipment $15,000

2. Incremental annual revenues (for five years) $80,000.

3. Incremental annual expenses (for five years) $70,000.

Other information

1. Assume the estimated life of the equipment is five years and that there will be no salvage value. Further assume the depreciation method used in straight line.

2. Assume the relevant discount rate for NVP purposes is eight percent.

Required:

1. Determine the ARR

2. Determine the payback period

3. Determine the NPV

Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal...