Your client has a potential business opportunity. He has given you the following information.
1] Rent will be $3,500 per month. 2] Equipment will cost $270,000; estimated life is 15 years after which it will have a salvage value of $18,000. Depreciation will be straight line after considering the salvage value.
3] Projected sales are $300,000 per year and CGS are projected at 20% of sales.
4] Operating costs are: Salaries $70,000 per year Insurance $3,500 per year Utilities $27,000 per year Royalties 12.5% of sales
5] Ignore all income taxes. Required:
a] Prepare a contribution format income statement that shows the expected annual net operating income.
b] Compute the simple rate of return for the project. Your client requires a simple rate of return of 14%; should he do the deal?
c] Compute the payback period for the project. If your client wants a payback period of four years or less, will he do the deal?