Question

Paul Swanson has an opportunity to acquire a franchise from the yogurt Place.   PLEASE SHOW ALL WORK...

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 $4,800 per month. Remodeling and necessary equipment would cost $396,000. The equipment would have a 10-year life and an $39,600 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 $510,000 per year. Ingredients would cost 20% of sales. Operating costs would include $91,000 per year for salaries. $5,600 per year for insurance, and $48,000 per year for utilities. In addition. Mr. Swanson would have to pay a commission to The Yogurt Place, Inc., of 14.5% of sales. Required: Prepare a contribution format income statement that shows the expected net operating income each year from the franchise outlet. Compute the simple rate of return promised by the outlet. (Round percentage answer to 1 decimal place, i.e. 0.123 should be considered as 12.3%.) Simple rate of return If Mr. Swanson requires a simple rate of return of at least 22%. should he acquire the franchise? Yes No Compute the payback period on the outlet. (Round your answer to 1 decimal place.) Payback period years If Mr. Swanson wants a payback of two years or less, will he acquire the franchise? Yes No

Answer 1

Hi there,

1. Lets first construct the P&L statement :

Sales		510000
Variable expenses:
Cost of ingredients (20%* 510000)	102000
Commissions (14.5%*510000)	73950	175950
Contribution Margin		334050
Selling and administrative expenses
Salaries	91000
Depreciation(396000-39600)/10	35640
Insurance	5600
Utilities	48000
Rent (4800*12)	57600	237840
Net Operating Income		$96210

2A) For Simple rate of return:

Rate = NOI/Initial Investment

= 96210/396000 = 24.3%

2B) As the rate of return is higher than the required 22%, he should take the franchise.

3A) To calculate the payback period, we need to calculate the Annual net cash flow

Annual net cash flow = 96210 +35640 = $131850

Payback period = Initial Investment/ Annual net cash flow = 396000/131850 = 3 years

3B) As the payback period is more than 2 years, he will not acquire the franchise.

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Cheers!!