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