Problem 3

Nucci's Restaurant is considering the purchase of a second oven that would accommodate its new take-out business. The oven would cost $17,000, have an estimated salvage (residual) value of $5,000, and would have a useful life of six years. Cash revenues produced each year would be expected to total $22,000, and annual cash operating expenses would total $16,000. Management uses the straight-line method to depreciate its plant (fixed) assets, requires a minimum desired rate of return of 30% and requires a maximum cash payback period of 2 years..

Required (ROUND ALL ANSWERS TO ONE DECIMAL PLACE):

1. Compute the Average (Accounting) Rate of Return for this proposal. SHOW ALL WORK.

2. According to your analysis, should Nucci's Restaurant purchase the second oven according to the Average (Accounting)

Rate of Return Method - Yes or No?

3. Compute the Cash Payback Period for this proposal. SHOW ALL WORK.

4. According to your analysis, should Nucci's Restaurant purchase the second oven according to the Cash Payback

Period Method for the analysis - Yes or No?