WleyPLUS PLUS Kimmel, Accounting: Tools for Business Decision Making, Se FINANCI

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WleyPLUS PLUS Kimmel, Accounting: Tools for Business Decision Making, Se FINANCIAL AND MANAGERIAL ACCOUNTING ( ) Study & Practice Assignment pen Assignment cucuLATOR rLA SCREEN PRINTER VERS?ON SOURCES Problem 24-2A ianment Lon Timur is an accounting major at a midwestern state university located apprexcimately 60 mlies from a major oty. Many of the students attending the university are from the metropolitan area and visit their homes regularly on the weekends. Lon, an entrepreneur at heart, realzes that few good cemmuting alternatives are available for students doing weekend travel. He believes that a weekend commuting service could be organized and run suburban and downtown shopping mall locations. Lon has gathered the following investment information. profitably from several 1. Five used vans would cost a total of $75,100 to purchase and would have a 3-year useful life with negligible salvage value. Lon plans to use straight- ine depreciation. 2. Ten drivers would have to be employed at a total payroll expense of $48,005. 3. Other annual out-of-pocket expenses associated with running the commmuter service would include Gasoline $16.005, Maintenance $3,309, Repairs $3,992, Insurance $4,210, Advertising $2,491. Lon has visited several financial institutions to dscuss funding. The best interest rate he has been able to negotiate is 15% Use this rate for cost of capital. 4· 5. Lon expects each van tetnake ten round trips weekly and carry an average of six students each trip. The service is expected to operate 30 weeks each and each student will be charged $12.03 for a round-trip ticket. (For calculation purposes, use 5 decimal places as displayed in the factor table provided.) ® Your answer is incorrect. Try again. Determine the annual (1) net income and (2) net annual cash fiows for the commuter service. (Round answers to o decimal places, e.g. 125.) 5000 Net annual cash fiows t Prhasy Polisy1 2000-2018John Wley &5s Ins All Rights Reserved.A Version 4.24.6.2

Explanation / Answer

Solution 1:

Solution 2:

Payback period = Intitial investment / Annual cash inflows = $75,100/ $30,258 = 2.48 years

Annual rate of return = Average annual income / Average investment

Average investment = ($75,100 + 0) / 2 = $37,550

Average annual income = $5,225

Annual rate of return = $5,225 / $37,550 = 13.91%

Solution 3:

Computation of annual income - Commuter service Particulars Amount Sales Revenue (5*10*30*6*$12.03) $108,270 Cost: Gasoline $16,005 Maintenance $3,309 Repairs $3,992 Insurance $4,210 Advertising $2,491 Payroll expense $48,005 Depreciation ($75,100/3) $25,033 Net Annual Income $5,225

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