Reference no: EM132524218

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:

1. A suitable location in a large shopping mall can be rented for $3,200 per month.
2. Remodeling and necessary equipment would cost $300,000. The equipment would have a 20-year life and a $15,000 salvage value. Straight-line depreciation would be used, and the salvage value would be considered in computing depreciation.
3. Based on similar outlets elsewhere, Mr. Swanson estimates that sales would total $350,000 per year. Ingredients would cost 20% of sales.
4. Operating costs would include $75,000 per year for salaries, $4,000 per year for insurance, and $32,000 per year for utilities. In addition, Mr. Swanson would have to pay a commission to The Yogurt Place, Inc., of 15.0% of sales.

Required:

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

Question 2.1: Compute the simple rate of return promised by the outlet.

Question 2.2: If Mr. Swanson requires a simple rate of return of at least 19%, should he acquire the franchise?

Question 3. 1: Compute the payback period on the outlet.

Question 3.2: If Mr. Swanson wants a payback of three years or less, will he acquire the franchise?