Question - A company sells is considering a new site that will require a $2 million investment for land acquisition and construction costs. The following operating results are expected:
Sales revenue $980000
Less operating expenses:
Food/supplies $320000
Wages/salaries $180000
Insurance/taxes $40000
Utilities $10000
Depreciation $70000
Operating Income = $360000
Disregard income taxes.
A. If management requires a payback period of four years or less, should the new site be opened?
B. Compute the accounting rate of return on the initial investment.
C. What significant limitation of payback and the accounting rate of return is coverove by the net present value method?