Sally’s Subs 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 $60,000. Sally Holding, manager of Sally’s Subs, expects the drive through operations to increase annual sales by $50,000, with a 40 percent contribution margin ratio. Assume that the system has an economic life of six years, at which time it will have no disposal value. 

The required rate of return is 14 percent. 

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

2. Compute the net present value (NPV). Should Holding accept the proposal? Why or why not? 

3. Compute the internal rate of return (IRR). How should the IRR be used to decide whether to accept or reject the proposal? 

4. Using the accounting rate of return model, compute the rate of return on the initial investment.