Restaurant Purchasing a POS System

Restaurant Purchasing a POS System

Question One:

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

i)                    Payback period

a.       Undiscounted payback period

Nance’s Restaurant
Year 0
Year 1
Year 2
Year 3
Hardware and software cost
$20,000.00

Incremental increases in profit

$8,000
$9,000
$10,000
Cumulative increases in profit

$8,000
$17,000
$27,000
Payback period (undiscounted) = 2 years + ($20,000 – 17,000)/10,000 = 2.3 years (2 years, 3 ½ months).

b.      Discounted payback period

Nance’s Restaurant
Year 0
Year 1
Year 2
Year 3
Hardware and software cost
$20,000.00

incremental increases in profit

$8,000
$9,000
$10,000
Present value interest factors at 18 %

0.9259
0.8573
0.7938
Present values

$7,407.41
$7,716.05
$7,938.32
Cumulative increases in profit (present values)

$7,407
$15,123
$23,062
Payback period (discounted) = 2 years + ($20,000 – 15,123)/7,938.32 = 2.61 years (2 years, 7.37 months).

ii)                  Present value

Present value = Sum of all present values of the cash flows.

Nance’s Restaurant
Year 0
Year 1
Year 2
Year 3
Hardware and software cost
$20,000.00

incremental increases in profit

$8,000
$9,000
$10,000
Present value interest factors at 18 %

0.9259
0.8573
0.7938
Present values

$7,407.41
$7,716.05
$7,938.32
Total present value
$23,061.78

iii)                Net present value

Nance’s Restaurant
Year 0
Year 1
Year 2
Year 3
Hardware and software cost
$20,000.00

incremental increases in profit

$8,000
$9,000
$10,000
Present value interest factors at 18 %

0.9259
0.8573
0.7938
Present values

$7,407.41
$7,716.05
$7,938.32
Total present value
$23,061.78

Net Present value = Present value – initial cost $(23,061.78 – 20,000)
$3,061.78

Since the net present value is positive (i.e., NPV>0), Nance restaurant should consider installing the new POS system.

References

Pandey, I. M.  (1998). Financial Management (9th edition), Vikas Publishing, India.

Weston, J.F. & Copeland, T.E.  (1991). Managerial Finance (9th edition). Dryden Press.

Van Horne, J. (2008). Fundamentals of Financial Management. Prentice-Hall International Edition.

 

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