The owner of Zivanovs Pancake House is considering an expansion of the business. He has identified two alternatives, as follows: Build a new restaurant near the mall. Buy and renovate an old building downtown for the new restaurant. The projected cash flows from these two alternatives are shown below. The owner of the restaurant uses a 10 percent after-tax discount rate.

Net After-Tax Cash Inflows*

Investment

Cash Outflow:

Proposal

Time 0

Years 110

Years 1120

Mall restaurant

$

400,000

$

50,000

$

50,000

Downtown restaurant

200,000

35,800

*	Includes after-tax cash flows from all sources, including incremental revenue, incremental expenses, and depreciation tax shield.

The owner of Zivanovs Pancake House will consider capital projects only if they have a payback period of six years or less. The owner also favors projects that exhibit an accounting rate of return of at least 15 percent. The owner bases a projects accounting rate of return on the initial investment in the project.

Required:

1.

Compute the payback period for each of the proposed restaurant sites. (Round your answer to 1 decimal place.)

	Payback Period
Mall restaurant		years
Downtown restaurant		years

2.

Compute the accounting rate of return for each proposed site. Assume the average annual incremental income is $50,000 for the mall restaurant and $35,800 for the downtown restaurant. (Round your "Percentage" answer to 1 decimal place (i.e., .1234 should be entered as 12.3).)

	Accounting Rate of Return
Mall restaurant		%
Downtown restaurant		%

3.

If the owner of the restaurant sticks to his criteria, which site will he choose?

	Mall site
	Downtown site
	Both
	None of the above

4.

Both the payback period and accounting-rate-of-return method consider the time value of money.

	True
	False