Mr. Al Aska has an opportunity to acquire a franchise from The Milkee Tree to dispense milk products under The Milkee Tree name. Mr. Aska has gathered the following information relating to the franchise:

a. A suitable location in a large shopping mall can be rented for P17,500 per month.

b. Remodeling and necessary equipment would cost P1,350,000. The equipment would have a 15-year life and an P90,000 salvage value. Straight-line depreciation would be used, and the salvage value would be considered in computing depreciation.

c. Based on similar outlets elsewhere, Mr. Aska estimates that sales would total P1,500,000 per year. Ingredients would cost 20% of sales.

d. Operating costs would include P350,000 per year for salaries, P17,500 per year for insurance, and P135,000 per year for utilities. In addition, Mr. Aska would have to pay a commission to The Milkee Tree of 12.5% of sales.

Required:

1. Prepare a contribution format income statement that shows the expected net operating income each year from the franchise outlet.

2. Compute the simple rate of return promised by the outlet. If Mr. Aska requires a simple rate of return of at least 12%, should he acquire the franchise?

3. Compute the payback period on the outlet. If Mr. Aska wants a payback of four years or less, will he acquire the franchise?