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484132604
484132604
16.06.2021 • 
Mathematics

Question No. (8) A) Big Burgers (BB) 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 $40,000 J Sagr, manager of BB's expects the drive- through operations to increase annual sales by $25,000, 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%.
Required:
1. Compute the payback period. Is this a good measure of profitability?
2. Compute the NPV. Should Sagr accept the proposal? Why or why not.
3. Using the ARR model, compute the rate of return on the initial investment.
4. Compute the profitability index.

B) Gaza co., manufactured and sold 1000 solar system last year at a price of $800 each. The cost structure of solar system is as follows:
Variable cost per system $350
Factory overhead (Total fixed costs $200,000. Due to heavy competition, price has to be reduce to $750 for the coming year.
Required: Assuming no change in costs, state the number of solar system that would have to be sold at the new price to ensure the same amount of profits as that of the last year.

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