Question

In: Accounting

Seth Fitch owns a small retail ice cream parlor. He is considering expanding the business and...

Seth Fitch owns a small retail ice cream parlor. He is considering expanding the business and has identified two attractive alternatives. One involves purchasing a machine that would enable Mr. Fitch to offer frozen yogurt to customers. The machine would cost $8,100 and has an expected useful life of three years with no salvage value. Additional annual cash revenues and cash operating expenses associated with selling yogurt are expected to be $6,080 and $850, respectively.

Alternatively, Mr. Fitch could purchase for $9,920 the equipment necessary to serve cappuccino. That equipment has an expected useful life of four years and no salvage value. Additional annual cash revenues and cash operating expenses associated with selling cappuccino are expected to be $8,320 and $2,380, respectively.

Income before taxes earned by the ice cream parlor is taxed at an effective rate of 20 percent.

   

Required

  1. Determine the payback period and unadjusted rate of return (use average investment) for each alternative. (Round your answers to 2 decimal places.)

Solutions

Expert Solution

Particulars

Alternative-1

Alternative-2

Revenues

6,080

8,320

Less: Cash operating expenses

850

2,380

Less: Depreciation expenses [$8,100/3] & [9,920/4]

2,700

2,480

Income before taxes

2,530

3,460

Less: Income taxes at 20%

506

692

Net Income

2,024

2,768

Add: Depreciation expenses

2,700

2,480

Annual cash flow

4,724

5,248

Payback Period for Alternative-1 = Initial investment / Annual cash flow

= $8,100 / $4,724

= 1.71 Years

Payback Period for Alternative-2 = Initial investment / Annual cash flow

= $9,920 / $5,248

= 1.89 Years

Unadjusted rate of return for Alternative-1 = Net Income / Average investment

= $2,024 / [$8,100 / 2]

= $2,024 / $4,050

= 0.4998

= 49.98%

Unadjusted rate of return for Alternative-2 = Net Income / Average investment

= $2,768 / [$9,920 / 2]

= $2,768 / $4,960

= 0.5581

= 55.81%


Related Solutions

Seth Fitch owns a small retail ice cream parlor. He is considering expanding the business and...
Seth Fitch owns a small retail ice cream parlor. He is considering expanding the business and has identified two attractive alternatives. One involves purchasing a machine that would enable Mr. Fitch to offer frozen yogurt to customers. The machine would cost $7,830 and has an expected useful life of three years with no salvage value. Additional annual cash revenues and cash operating expenses associated with selling yogurt are expected to be $6,070 and $880, respectively. Alternatively, Mr. Fitch could purchase...
Seth Fitch owns a small retail ice cream parlor. He is considering expanding the business and...
Seth Fitch owns a small retail ice cream parlor. He is considering expanding the business and has identified two attractive alternatives. One involves purchasing a machine that would enable Mr. Fitch to offer frozen yogurt to customers. The machine would cost $7.560 and has an expected useful life of three years with no salvage value. Additional annual cash revenues and cash operating expenses associated with selling yogurt are expected to be $6,080 and $880, respectively. Alternatively, Mr. Fitch could purchase...
Seth Fitch owns a small retail ice cream parlor. He is considering expanding the business and...
Seth Fitch owns a small retail ice cream parlor. He is considering expanding the business and has identified two attractive alternatives. One involves purchasing a machine that would enable Mr. Fitch to offer frozen yogurt to customers. The machine would cost $7,680 and has an expected useful life of three years with no salvage value. Additional annual cash revenues and cash operating expenses associated with selling yogurt are expected to be $6,120 and $840, respectively. Alternatively, Mr. Fitch could purchase...
Seth Fitch owns a small retail ice cream parlor. He is considering expanding the business and...
Seth Fitch owns a small retail ice cream parlor. He is considering expanding the business and has identified two attractive alternatives. One involves purchasing a machine that would enable Mr. Fitch to offer frozen yogurt to customers. The machine would cost $7,950 and has an expected useful life of three years with no salvage value. Additional annual cash revenues and cash operating expenses associated with selling yogurt are expected to be $6,020 and $830, respectively. Alternatively, Mr. Fitch could purchase...
The Ice Cream Parlor is the only ice cream parlor in Beautown. The son of the...
The Ice Cream Parlor is the only ice cream parlor in Beautown. The son of the owner is just back from college, where he majors in economics. He has just studied demand analysis and he decides to apply what he has learned to estimate the demand for ice cream in his father’s parlor during his summer vacation. Using regression analysis, he estimates the following demand function:                                                                                                                                                                                Q = 100-20P                                                                                                                                                       a. Find the point price elasticity at each dollar price, from P...
Jerry’s Ice Cream Parlor is considering a marketing plan to increase sales of ice cream cones....
Jerry’s Ice Cream Parlor is considering a marketing plan to increase sales of ice cream cones. The plan will give customers a free ice cream cone if they buy 10 ice cream cones at regular prices. Customers will be issued a card that will be punched each time an ice cream cone is purchased. After 10 punches, the card can be turned in for a free ice cream cone. Jerry Donovna, the company’s owner, is not sure how the new...
Trang owns a(n) ice cream parlor that is worth 70,263 dollars and is expected to make...
Trang owns a(n) ice cream parlor that is worth 70,263 dollars and is expected to make annual cash flows forever. The cost of capital for the ice cream parlor is 18.59 percent. The next annual cash flow is expected in 1 year and is expected to be 10,420 dollars. All subsequent cash flows are expected to grow annually at a constant growth rate. What is the cash flow produced by the ice cream parlor in 5 years expected to be?...
Candice operates an ice cream parlor in a small town in Tristate area. She knows that...
Candice operates an ice cream parlor in a small town in Tristate area. She knows that this a monopolistically competitive business because other producers in the area supply different flavors of ice cream. Candice runs her business as efficiently as possible, to maximize her profits. This year, Candice charges $5 per ice cream and experiences marginal cost of $3 and average total cost of $4 per ice cream at the optimal level of output. Does Candice have profits in short...
Kairi owns an ice cream parlor. In one hour she can produce 10 milkshakes or 30...
Kairi owns an ice cream parlor. In one hour she can produce 10 milkshakes or 30 sundaes. Sora also owns an ice cream parlor. In one hour he can produce 8 milkshakes or 16 sundaes. A mutually beneficial term of trade for 1 milkshake would be for more than ____, but less than ____ sundae(s).         3; 1/2         1/3; 1/2         2; 3         3; 2         1/3; 2
John Smith is looking to open an ice-cream parlor place in the neighborhood where he resides....
John Smith is looking to open an ice-cream parlor place in the neighborhood where he resides. He has been thinking about this project for a while. He has completed the technical, legal, and economic feasibility studies in order to decide properly. The economic study presented him with the following financial forecasts: The project will last 5 years. The price of an average creamery ice-cream cone should be $6 per unit. Under the current conditions, it is not expected that the...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT