Practise calculating and evaluating payback period and average rate of return (ARR) for IB Business Management HL investment decisions.
Solar Soccer Academy Ltd. (SSA)
Solar Soccer Academy Ltd. (SSA) is a private limited company set up five years ago by Stephen Murdock. It provides top-quality soccer (football) skills and technique coaching. So far, SSA has been a success, and Stephen is deciding whether to open another academy in a neighbouring city.
The cost of building a second academy is $ 500000. Stephen has produced forecasted financial information for the second academy's first five years of operation (see Table 1).
Table 1: Forecasted financial information for a second academy
Stephen estimates cash outflow to be 25 % of the total cash inflow in years 1,2 and 3 and 20 % of the total cash inflow in years 4 and 5.
Using Table 1 and other information provided, calculate for SSA's second academy:
the payback period (show all your working);
the average rate of return (ARR) for the first five years of operation (show all your working);
Explain one disadvantage for SSA of only using the payback period method in making its decision to open a second academy.