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Simple Rate of Return and Payback

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Misty pizza wants to purchase a large oven and equipment for mixing bread. Both will cost $120,000 to deliver and install. The company plan to use it for 15 years, with a scrap value of 10%.
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1. The purchase of the oven and equipment is estimated to bake and sell 72,000 loaves of bread each year. The bread sells for $1.25 a loaf.
2. The cost of the ingredients in a loaf of bread is 40% of the selling price
3. Other cost associated is
a. Salaries $18,000
b. Utilities $9,000
c. Insurance $3,000

4. The pizza parlor uses straight-line depreciation on all assets, deducting salvage value from original cost.

Prepare a contribution format income statement showing the net operating income each yr from production to sale of bread

Compute the simple rate of return for the new oven and equipment. If simple rate of return above 12% is acceptable to Misty, will she purchase the oven and equipment?

Compute the payback period on the oven and equipment. If purchase the equipment with a 6yr payback, will it be wise to purchase?

(please use word"doc" and ignore income taxes)

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Solution Summary

This solution prepares an income statement of net operating income and shows step-by-step calculations to determine the simple rate of return and payback period for the equipment.

Solution provided by:
Gaurav Agarwal, MS
Education
  • BE, Bangalore University, India
  • MS, University of Wisconsin-Madison
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