Nance’s Restaurant, a local independent restaurant, is evaluating new point-of-s

Question

Nance’s Restaurant, a local independent restaurant, is evaluating new point-of-sale (POS) systems and must determine if a new installation is feasible. A new POS installation would include both software and hardware, with a total cost of $20,000. Nance’s Restaurant is currently operating without a point-of-sale system and utilizes a chit system with carbon copy papers that allow the waitstaff to provide a copy to the kitchen and the customer while retaining a copy for accounting purposes. Management is aware that this is INVESTMENT ANALYS IS 245 an archaic system and that a POS system will create efficiencies, but they are not sure it is worth the cost. Through analysis, management has determined that a POS system would allow the waitstaff to turn tables quicker, therefore increasing the number of guests serviced and the sales volume. Another advantage of the POS system is that it provides reports to management, allowing them to better analyze their business. Taking all of these factors into consideration, Nance’s management forecasts incremental increases in profit over the next three years of $8,000, $9,000, and $10,000.

Questions:

1. Determine the payback period, present value, and net present value of this project for the three-year period, utilizing an 8% discount rate.

2. Management has received an offer from another POS vendor with installation costs of $25,000. The second vendor is offering increased functionality in the form of additional cost control reports, which would allow the restaurant to realize an additional $500 in incremental profits per year for a total of $8,500, $9,500, and $10,500. Financially, does this option fit Nance’s Restaurant’s criteria? Please explain your answer.

Explanation / Answer

      1 Nance's Restaurant NPV details Year 0 Year 1 Year 2 Year 3 Investment in POS          (20,000) Increased Net Profit               8,000                 9,000             10,000 Net Cash flows          (20,000)               8,000                 9,000             10,000 PV factor @8%                       1               0.926                 0.857                0.794 PV of Net Cash flows          (20,000)               7,407                 7,716                7,938 NPV =sum of PV of net cash flows               3,062 Payback period= 2.33 years PV of Cash inflows=            23,062 NPV =               3,062       2 Alternate option Nance's Restaurant NPV details Year 0 Year 1 Year 2 Year 3 Investment in POS          (25,000) Increased Net Profit               8,500                 9,500             10,500 Net Cash flows          (25,000)               8,500                 9,500             10,500 PV factor @8%                       1               0.926                 0.857                0.794 PV of Net Cash flows          (25,000)               7,870                 8,145                8,335 NPV =sum of PV of net cash flows                (650) Payback period=                 2.67 years PV of Cash inflows=            24,350 NPV =                (650) As the NPV is negative , the second option does not meet the criteria

Related Questions

Navigate

• Browse (All)
• Browse N
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.