PLEASE DOUBLE CHECK YOUR WORK Lon Timur is an accounting major at a midwestern s

Question

PLEASE DOUBLE CHECK YOUR WORK

Lon Timur is an accounting major at a midwestern state university located approximately 60 miles from a major city. 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, realizes that few good commuting alternatives are available for students doing weekend travel. He believes that a weekend commuting service could be organized and run profitably from several suburban and downtown shopping mall locations. Lon has gathered the following investment information. 1. Five used vans would cost a total of $76,000 to purchase and would have a 3-year useful life with negligible salvage value. Lon plans to use straight-line depreciation. 2. Ten drivers would have to be employed at a total payroll expense of $47,990. 3. Other annual out-of-pocket expenses associated with running the commuter service would include Gasoline $15,990, Maintenance $3,290, Repairs $4,000, Insurance $4,210, and Advertising $2,500. 4. Lon has visited several financial institutions to discuss funding. The best interest rate he has been able to negotiate is 15%. Use this rate for cost of capital. 5. Lon expects each van to make ten round trips weekly and carry an average of six students each trip. The service is expected to operate 30 weeks each year, and each student will be charged $12.05 for a round-trip ticket.

(a)

Determine the annual (1) net income and (2) net annual cash flows for the commuter service. (Round answers to 0 decimal places, e.g. 125.) Net income $ Net annual cash flows $
(b)

Compute (1) the cash payback period and (2) the annual rate of return. (Round answers to 2 decimal places, e.g. 10.50.) Cash payback period years Annual rate of return %
(c)

Compute the net present value of the commuter service. (Round answer to 0 decimal places, e.g. 125. If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Net present value

Explanation / Answer

- $ 5,591.42

All Amounts in $ (a) Determine the annual (1) net income and (2) net annual cash flows for the commuter service. (Round answers to 0 decimal places, e.g. 125.) Net income $ 108450 6 Students X 10 Weekly Round Trips X 30 weeks X $ 12.05 per trip X 5 vans Net annual cash flows $ 30470 Net Annual Cash Flows Revenue from Students per year as above 108450 Less: Costs incurred Driver Salaries 47990 Gasoline 15990 Maintenance 3290 Repairs 4000 Insurance 4210 Advertising 2500 77980 Net Annual Cash Flows 30470 (b) Compute (1) the cash payback period and (2) the annual rate of return. (Round answers to 2 decimal places, e.g. 10.50.) Cash payback period 2.59 years Cash Payback period for the investment of $ 76,000 is 30,470 X 2 = 60,940 in two years plus balance 15,060 / 30,470 X 12 = 5.93108 months Total 2 years 5.93 months or 2.59 years Annual rate of return 40.09% Annual Rate of Return = Annual Cash Flows / Investment = $ 30,470 / $ 76,000 = 40.09% Given the discount rate as 15% (loan borrowing rate), (c) the Net Present Value of the commuter service works out to -5,591.42 Compute the net present value of the commuter service. (Round answer to 0 decimal places, e.g. 125. If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Net present value

- $ 5,591.42

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