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 18%, 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?

Vikarmbhai

A company is considering several mutually exclusive ways that can meet a requirement for a filling machine for its creamer line. One choice is to buy a machine. This would cost $75 000 and last for six years with a salvage value of $12 000. Alternatively, it could contract with a packaging supplier to get a machine free. In this case, the extra costs for packaging supplies would amount to $17 500 per year over the six-year life (after which the supplier gets the machine back with no salvage value for the company). The third alternative is to buy a used machine for $40 000 with zero salvage value after six years. The used machine has extra maintenance costs of $3500 in the first year, increasing by $2500 per year. In all cases, there are installation costs of $8000 and revenues of $25 000 per year. a) Using the IRR method, determine which is the best alternative. The MARR is 10 percent.

After a trip to Bordeaux, France, you are considering opening a restaurant based on Restaurant L'Entrecote. You will offer a fixed menu of salad, steak and french fries. You plan to run the restaurant for two years and then retire. Start-up costs, to be incurred immediately, are $500,000. Start-up costs include kitchen equipment, kitchen supplies, renovations, furniture, fixtures, and the point-of-sales system. Assume that all of those assets are classified as 5-year property (with depreciation rates of 20% and 32% in the first two years). The assets can be sold for $150,000 after two years. You expect 100 diners per night. The restaurant will be open for 300 nights per year. The average diner orders food with a menu price of $35 and beverages with a menu price of $15. Food costs are 34% of the menu price and beverage costs are 50% of the menu price. The nightly wages are $2,160 (for the chef, 5 kitchen staff, a bartender, the Maitre d', and 10 wait staff). Municipal tax, rent, and…

Santana Rey is considering the purchase of equipment for Business Solutions that would allow the company to add a new product to its computer furniture line. The equipment is expected to cost $300,000 and to have a six-year life and no salvage value. It will be depreciated on a straight-line basis. Business Solutions expects to sell 100 units of the equipment’s product each year. The expected annual income related to this equipment follows. Sales . $375,000 Costs Materials, labor, and overhead (except depreciation) . 200,000 Depreciation on new equipment 50,000 Selling and administrative expenses 37,500 Total costs and expenses 287,500 Pretax income 87,500 Income taxes (30%) . 26,250 Net income . $ 61,250 Required Compute the (1) payback period and (2) accounting rate of return for this equipment. Report ARR in percent, rounded to one decimal.

Manji

Kent Duncan is exploring the possibility of opening a self-service car wash and operating it for the next five years until he retires. He has gathered the following information:   A building in which a car wash could be installed is available under a five-year lease at a cost of $3,600 per month. Purchase and installation costs of equipment would total $200,000. In five years the equipment could be sold for about 10% of its original cost. An investment of an additional $5,000 would be required to cover working capital needs for cleaning supplies, change funds, and so forth. After five years, this working capital would be released for investment elsewhere. Both a wash and a vacuum service would be offered. Each customer would pay $1.51 for a wash and $.81 for access to a vacuum cleaner. The only variable costs associated with the operation would be 7.5 cents per wash for water and 10 cents per use of the vacuum for electricity. In addition to rent, monthly costs of operation…

Kent Duncan is exploring the possibility of opening a self-service car wash and operating it for the next five years until he retires. He has gathered the following information:   A building in which a car wash could be installed is available under a five-year lease at a cost of $4,700 per month. Purchase and installation costs of equipment would total $300,000. In five years the equipment could be sold for about 10% of its original cost. An investment of an additional $3,000 would be required to cover working capital needs for cleaning supplies, change funds, and so forth. After five years, this working capital would be released for investment elsewhere. Both a wash and a vacuum service would be offered. Each customer would pay $1.15 for a wash and $.70 for access to a vacuum cleaner. The only variable costs associated with the operation would be 7.5 cents per wash for water and 10 cents per use of the vacuum for electricity. In addition to rent, monthly costs of operation…

Kent Duncan is exploring the possibility of opening a self-service car wash and operating it for the next five years until he retires. He has gathered the following information:   A building in which a car wash could be installed is available under a five-year lease at a cost of $3,400 per month. Purchase and installation costs of equipment would total $315,000. In five years the equipment could be sold for about 10% of its original cost. An investment of an additional $2,000 would be required to cover working capital needs for cleaning supplies, change funds, and so forth. After five years, this working capital would be released for investment elsewhere. Both a wash and a vacuum service would be offered. Each customer would pay $1.54 for a wash and $.85 for access to a vacuum cleaner. The only variable costs associated with the operation would be 7.5 cents per wash for water and 10 cents per use of the vacuum for electricity. In addition to rent, monthly costs of operation…

You must analyze a potential new product --- a caulking compound that Korry Materials’ R&D people developed for use in the residential construction industry.  Korry’s marketing manager thinks they can sell 115,000 tubes per year at a price of $3.25 each for 3 years, after which the product will be obsolete.  The required equipment would cost $125,000, plus another $25,000 for shipping and installation.  Current assets (receivables and inventories) would increase by $35,000, while current liabilities (accounts payables and accruals) would rise by $15,000.  Variable costs would be 60 percent of sales revenue, fixed costs (exclusive of depreciation) would be $70,000 per year, and the fixed assets would be depreciated under MACRS with a 3-year life.  When production ceases after 3 years, the equipment should have a market value of $15,000.  Korry’s tax rate is 40 percent, and it uses a 10 percent WACC for average risk projects.   The R&D costs for the new product were $30,000, and…