Problem 24-2A Your answer is incorrect. Try again Lon Timur is an accounting maj

Question

Problem 24-2A Your answer is incorrect. Try again 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 Five used vans would cost a total of $74,300 to purchase and would have a 3-year useful life with negligible salvage value. Lon plans to use straight-line depreciation Ten drivers would have to be employed at a total payroll expense of $47,990 Other annual out-of-pocket expenses associated with running the commuter service would include Gasoline $16,010, Maintenance $3,310, Repairs $4,010, Insurance $4,200, and Advertising $2,490 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 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 $12.00 for a round-trip ticket. 1. 2. 3. 4, 5. ere iew abl 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 76 Net annual cash flows 86

Explanation / Answer

Sales = 5 x 10 x 30 x 6 x 12 = $108,000

Costs = 47,990 + 16,010 + 3,310 + 4,010 + 4,200 + 2,490 = $78,010

Depreciation = Investment / No. of years = 74,300 / 3 = 24,767

Net Income = Sales - Costs - Depreciation = $5,223

Cash Flows = Sales - Costs = $29,990

Cash payback period = Investment / Cash Flows = 74,300 / 29,990 = 2.48 years

Annual rate of return = Net Income / Investment = 5,223 / 74,300 = 7%

NPV = CF0 + CF1 / (1 + r) + CF2 / (1 + r)^2 + CF3 / (1 + r)^3

= -74,300 + 29,990 / 1.15 + 29,990 / 1.15^2 + 29,990 / 1.15^3

= -5,826.08

0 1 2 3 Investment -74,300 Sales 108000 108000 108000 Costs -78010 -78010 -78010 Depreciation -24766.7 -24766.7 -24766.7 Net Income 5223.333 5223.333 5223.333 Cash Flows -74,300 29990 29990 29990 NPV -$5,826.08

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.