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 suitable location in a large shopping mall can be rented for $4,300 per month.Remodeling and necessary equipment would cost $366,000. The equipment would have a 20-year life and a $18,300 salvage value. Straight-line depreciation would be used, and the salvage value would be considered in computing depreciation.Based on similar outlets elsewhere, Mr. Swanson estimates that sales would total $460,000 per year. Ingredients would cost 20% of sales.Operating costs would include $86,000 per year for salaries, $5,100 per year for insurance, and $43,000 per year for utilities. In addition, Mr. Swanson would have to pay a commission to The Yogurt Place, Inc., of 12.0% of sales. Required: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 22%, 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?

Contribution format income statement shows the net operating income by computing contribution margin…

Answered: 1. Prepare a contribution format income…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter9: Capital Budgeting And Cash Flow Analysis

Section: Chapter Questions

Problem 18P

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Question

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 suitable location in a large shopping mall can be rented for $4,300 per month.
Remodeling and necessary equipment would cost $366,000. The equipment would have a 20-year life and a $18,300 salvage value. Straight-line depreciation would be used, and the salvage value would be considered in computing depreciation.
Based on similar outlets elsewhere, Mr. Swanson estimates that sales would total $460,000 per year. Ingredients would cost 20% of sales.
Operating costs would include $86,000 per year for salaries, $5,100 per year for insurance, and $43,000 per year for utilities. In addition, Mr. Swanson would have to pay a commission to The Yogurt Place, Inc., of 12.0% of sales.

Required:

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 22%, 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?

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