Please include step by step inctruction for this if possible - Thank you very mu
ID: 2572145 • Letter: P
Question
Please include step by step inctruction for this if possible - Thank you very much.
11-42 NPV, IRR, and Payback Long Lake Dairy King 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 $90,000. Jenna Holding, manager of Long Lake Dairy King, expects the drive-through operations to increase annual sales by $50,000, with a 40% 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 12%. Ignore taxes. 1. 2. Compute the payback period for the investment in the speaker system. Compute the net present value of the speaker system.Explanation / Answer
1. Payback period = cost of speaker / net annual cash inflow
= 90000/ 50000* 40%
= 90000/ 20000
= 4.5 years
2.Net present value = Present value of cash inflow - present value of cash outflow
= $20000 * PVAF (12%, 6years) - $90000
= 20000 * 4.111 - 90000
=82220 - 90000
= $ (7780)