TexaTaco 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 €36,000. Jessica Declan, manager of TexaTaco, expects the drive-through operations to increase annual sales by €25,000, with a 40 per cent contribution margin ratio. Assume that the system has an economic life of 6 years, at which time it will have no disposal value. The required rate of return is 12 per cent. Ignore taxes.

1. Compute the payback period. Is this a good measure of profitability?

2. Compute the NPV. Should Declan accept the proposal? Why or why not?

3. Using the ARR model, compute the rate of return on the initial investment.