Refer to the data given in the preceding problem. The owner of Zivanov’s Pancake House will consider capital projects only if they have a payback period of six years or less. The owner also favors projects that exhibit an accounting rate of return of at least 15 percent. The owner bases a project’s accounting rate of return on the initial investment in the project.

Required:

1. Compute the payback period for each of the proposed restaurant sites.

2. Compute the accounting rate of return for each proposed site. Assume the average annual incremental income is $50,000 for the mall restaurant and $35,800 for the downtown restaurant.

3. If the owner of the restaurant sticks to his criteria, which site will he choose?

4. Comment on the pros and cons of the restaurant owner’s investment criteria.