Lon Timur is an accounting major at a midwestern state university located approx

Question

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 $75,900 to purchase and would have a 3-year useful life with negligible salvage value. Lon plans to use straight-line depreciation.

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 $11.99 for a round-trip ticket.

Questions:

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.)

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

C) Compute the net present value of the commuter service. (Round answers 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.)

1: Five used vans would cost a total of $75,900 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 $47,993. 3: Other annual out-of-pocket expenses associated with running the commuter service would include Gasoline $16,000, Maintenance $3,306, Repairs $3,997, Insurance $4,194, Advertising $2,491. TABLE 1 Future Value of 1 Periods 4% 5% 1.00000 1.00000 1.00000 1.00000 1.00000 1.00000 1.00000 1.00000 1.00000 .00000 1.04000 1.05000 1.06000 1.07000 1.08000 1.09000 1.10000 .11000 1.12000 .15000 1.08160 .10250 .12360 1.14490 1.16640 1.18810 1.21000 .23210 1.25440 .32250 1.12486 15763 1.19102 1.22504 1.25971 1.29503 .33100 1.36763 1.40493 .52088 1.16986 1.21551 .26248 1.31080 1.36049 1.41158 1.46410 1.51807 1.57352 .74901 1.21665 1.27628 1.33823 1.40255 1.46933 1.53862 1.6105 .68506 1.76234 2.01136 1.26532 1.34010 1.41852 1.50073 1.58687 1.67710 1.77156 1.8704 197382 2.31306 1.31593 1.40710 1.50363 1.60578 1.71382 1.82804 1.94872 2.07616 2.21068 2.66002 1.368571.47746 1.59385 1.71819 .85093 1.99256 2.14359 2.30454 2.47596 3.05902 1.4233 .55133 1.68948 1.83846 1.99900 2.17189 2.35795 2.55803 2.77308 3.51788 1.48024 1.62889 1.79085 1.96715 2.15892 2.36736 2.59374 2.83942 3.10585 4.04556 1.53945 1.71034 1.89830 2.10485 2.33164 2.58043 2.85312 3.15176 3.47855 4.65239 1.60103 1.79586 2.01220 2.25219 2.51817 2.81267 3.13843 3.49845 3.89598 5.35025 1.665071.88565 2.13293 2.40985 2.71962 3.06581 3.45227 3.88328 4.36349 6.15279 1.73168 97993 2.26090 2.57853 2.93719 3.34173 3.79750 4.31044 4.8871 7.07571 1.80094 2.07893 2.39656 2.75903 3.17217 3.64248 4.17725 4.78459 5.47357 8.13706 1.87298 2.18287 2.54035 2.95216 3.42594 3.97031 4.59497 5.31089 6.13039 9.35762 1.94790 2.29202 2.69277 3.15882 3.70002 4.32763 5.05447 5.89509 6.86604 10.76126 2.02582 2.40662 2.85434 3.37993 3.99602 4.71712 5.55992 6.54355 7.68997 12.37545 2.10685 2.52695 3.02560 3.61653 4.31570 5.14166 6.591 7.26334 8.61276 14.23177 2.19112 2.65330 3.20714 3.86968 4.66096 5.60441 6.72750 8.06231 9.64629 6.36654 9 7 9

Explanation / Answer

A.

B. 1

($25300+$4629= $29,929 *)

B.2 Annual rate of return

C. Net present value of the commuter service.

(1) Annual Net Income $ (2) Annual Cash Inflow $ Sales *       107,910       107,910 Less : Expenses Driver's salaries         47,993        47,993 Out of pocket expenses ($16000+$3306+$3997+$4194+ $2491)         29,988        29,988 Depreciation ($75900/3)         25,300               -   Total Expense       103,281        77,981 Net Income          4,629 Cash Inflow        29,929 * (5 vans*10 trips*6 students*30 weeks*$11.99)

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