Your client has a 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.
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?