Payback period and simple rate of return

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Reference no: EM13955994

Payback Period and Simple Rate of Return

Jamieson Enterprises is considering the development of a go-kart track at an estimated total cost of $680,000. The go-karts would have a $50,000 salvage value at the end of their 10-year useful life. Estimated revenues and costs on an annual basis would be as follows:

Ticket revenues		$380,000
Less operating expenses:
Maintenance and utilities	$ 71,000
Salaries	130,000
Depreciation*	63,000
Insurance	43,000
Total operating expenses		307,000
Operating income		$ 73,000

Required:

Ignore income taxes.

1. Jamieson Enterprises will not proceed with development of the go-kart track unless the payback period is less than six years. Should they proceed?

2. Compute the simple rate of return for the go-kart track. If Jamieson Enterprises requires a simple rate of return of at least 10%, does the go-kart track meet this criterion?

Reference no: EM13955994

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