Reference no: EM132707006

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 $5,000 per month.
2. 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. 
3. Based on similar outlets elsewhere, Mr. Swanson estimates that sales would total $530,000 per year. Ingredients would cost 20% of sales. 
4. 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.

Required:

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

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

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

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

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