Barry's Burger Shack operates a single location at NEU selling burgers, fries, and sodas to faculty and students. Revenues for 2017 were $90,000 with profits of $2,250; industry benchmarks suggest profit margins should be close to 10% of revenue. Barry noticed an increasing number of complaints from customers over the quality of his burgers and the messiness of soda service are and has hired you to estimate the cost of quality for his burger business. One in 30 customers returned burgers for a replacement due to burger being too greasy, being serve too cool, or served with wrong ingredients, cost to replace was 1,600 per year.

You focus on reducing external failure cost. You analyze the cost of returned burgers and determine 70% of returns are due to wrong ingredients. You not Bary is using paper slips to send orders to the grill so you do some research and find a point of sale terminal that show customer what they are ordering and requires grille worker to confirm ingredients before wrapping burger. The new terminal will cost $3,000 with an expected life of 5 years (use SL depr.), but could save 80% of current returns due to wrong ingredients.

Require: Compute NPV for the new terminal with 40% tax rate and Barry's cost of capital = 10%

year 0 year 1 year 2 year 3 year 4 year 5

Initial cost (3,000)

Projected annual savings

SL depreciation

Pre-tax profit increase

less taxes at 40%

After tax profit increase

Add back depreciation

Cash flow (3,000)

NPV