Ben Paul is an accounting major at a western university located approximately 60
ID: 2593063 • Letter: B
Question
Ben Paul is an accounting major at a western 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. Ben, 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. Ben has gathered the following investment information.
1. Five used vans would cost a total of $90,000 to purchase and would have a 3-year useful life
with negligible salvage value. Ben plans to use straight-line depreciation.
2. Ten drivers would have to be employed at a total payroll expense of $43,000.
3. Other annual out-of-pocket expenses associated with running the commuter service would
include Gasoline $26,000, Maintenance $4,000, Repairs $5,300, Insurance $4,500,
Advertising $2,200.
4. Ben desires to earn a return of 15% on his investment.
5. Ben expects each van to make ten round trips weekly and carry an average of six students
each trip. The service is expected to operate 32 weeks each year, and each student will be
charged $15 for a round-trip ticket.
Instructions
(a) Determine the annual:
(1) net income and
(2) net annual cash flows for the commuter service.
(b) Compute the:
(1) cash payback period and
(2) annual rate of return. (Round to two decimals.)
(c) Compute the net present value of the commuter service. (Round to nearest dollar.)
(d) What should Ben conclude from these computations?
PROBLEM 26-2B
(a)
(1) Annual
Net Income
(2) Annual
Cash Flow
Sales
Expenses:
Total Expenses
Net Income
Cash Inflow
(b) (1)
Cash Payback Period =
Annual Rate of Return =
(c)
(d) Computations show that commuter service is a good investment for because:
Give AT LEAST 3 reasons!
(a)
(1) Annual
Net Income
(2) Annual
Cash Flow
Sales
Expenses:
Total Expenses
Net Income
Cash Inflow
Explanation / Answer
(d)
1. Initial investment is very low.
2. Commuting is a very important part of every body's daily activity.
3. The operating expenses are very low.
4. The payback period is very low.
(a) (1) Annual (2) Annual Net income cash flow Sales 144000 144000 Expenses: Payroll 43000 43000 Gasoline 26000 26000 Maintenance 4000 4000 Repairs 5300 5300 Insurance 4500 4500 Advertising 2200 2200 Depreciation 30000 0 Total expenses 115000 85000 Net income 29000 Cash Inflow 59000Related Questions
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