1. Prepare a contribution format income statement that shows the expected net operating income each year from the franchise outlet.2-a. Compute the simple rate of return promised by the outlet.2-b. If Mr. Swanson requires a simple rate of return of at least 18%, should he acquire the franchise?3-a. Compute the payback period on the outlet.3-b. If Mr. Swanson wants a payback of two years or less, will he acquire the franchise? Paul Swanson has an opportunity to acquire a franchise from The Yogurt Place, Inc., to dispense frozen yogurt products under TheYogurt Place name. Mr. Swanson has assembled the following information relating to the franchise:a. A suitable location in a large shopping mall can be rented for $5,000 per month.b. Remodeling and necessary equipment would cost $408,000. The equipment would have a 20-year life and a $20,400 salvagevalue. Straight-line depreciation would be used, and the salvage value would be considered in computing depreciation.c. Based on similar outlets elsewhere, Mr. Swanson estimates that sales would total $530,000 per year. Ingredients would cost 20% ofsales.d. Operating costs would include $93,000 per year for salaries, $5,800 per year for insurance, and $50,000 per year for utilities. Inaddition, Mr. Swanson would have to pay a commission to The Yogurt Place, Inc., of 15.5% of sales.

Pay-Back (PB) Period shows time in which investment made in any proposal is fully recovered with…

Prepare a contribution format income statement that shows the expected net operating income each year from the franchise outlet. 2-a. Compute the simple rate of return promised by the outlet. 2-b. If Mr. Swanson requires a simple rate of return of at least 18%, should he acquire the franchise? 3-a. Compute the payback period on the outlet. 3-b. If Mr. Swanson wants a payback of two years or less, will he acquire the franchise?

Prepare a contribution format income statement that shows the expected net operating income each year from the franchise outlet. 2-a. Compute the simple rate of return promised by the outlet. 2-b. If Mr. Swanson requires a simple rate of return of at least 18%, should he acquire the franchise? 3-a. Compute the payback period on the outlet. 3-b. If Mr. Swanson wants a payback of two years or less, will he acquire the franchise?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 14P

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Question

1. Prepare a contribution format income statement that shows the expected net operating income each year from the franchise outlet.

2-a. Compute the simple rate of return promised by the outlet.

2-b. If Mr. Swanson requires a simple rate of return of at least 18%, should he acquire the franchise?

3-a. Compute the payback period on the outlet.

3-b. If Mr. Swanson wants a payback of two years or less, will he acquire the franchise?

Paul Swanson has an opportunity to acquire a franchise from The Yogurt Place, Inc., to dispense frozen yogurt products under The
Yogurt Place name. Mr. Swanson has assembled the following information relating to the franchise:
a. A suitable location in a large shopping mall can be rented for $5,000 per month.
b. Remodeling and necessary equipment would cost $408,000. The equipment would have a 20-year life and a $20,400 salvage
value. Straight-line depreciation would be used, and the salvage value would be considered in computing depreciation.
c. Based on similar outlets elsewhere, Mr. Swanson estimates that sales would total $530,000 per year. Ingredients would cost 20% of
sales.
d. Operating costs would include $93,000 per year for salaries, $5,800 per year for insurance, and $50,000 per year for utilities. In
addition, Mr. Swanson would have to pay a commission to The Yogurt Place, Inc., of 15.5% of sales.

Definition Definition Percentage gain or loss from a specific investment over time. The rate of return is the difference between the closing and initial values of an investment divided by the initial value of the investment. The closing value includes any intermediate cash flows such as dividends or interest amounts.

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