Cindy Justus is managing director of the Wichita Day Care Center. Wichita is cur
ID: 2373896 • Letter: C
Question
Cindy Justus is managing director of the Wichita Day Care Center. Wichita is currently set up as a full-time child care facility for children between the ages of 12 months and 6 years. Cindy is trying to determine whether the center should expand its facilities to incorporate a newborn care room for infants between the ages of 6 weeks and 12 months. The necessary space already exists. An investment of $26,435 would be needed, however, to purchase cribs, high chairs, etc. The equipment purchased for the room would have a 5-year useful life with zero salvage value.
The newborn nursery would be staffed to handle 12 infants on a full-time basis. The parents of each infant would be charged $203 weekly, and the facility would operate 52 weeks of the year. Staffing the nursery would require two full-time specialists and five part-time assistants at an annual cost of $103,813. Food, diapers, and other miscellaneous supplies are expected to total $13,886 annually.
Annual net income $ 3686
Net cash flow for the new nursery. $8973
The annual rate of return =28%
The cash payback period for the new nursery. 2.95 years
Assuming that Wichita can borrow the money needed for expansion at 10%, compute the net present value of the new room. $?
Explanation / Answer
Annual net income: $3686
Free revenue - (Salaries expense + food and supplies expense + Depreciation expense) = Net income
$126,048* - (103,813 + 13,886 + 5,520**) = $2829
*12 x $203 x 52 = $126,048 Free revenue
**$26,435 / 5 = $5,520
Net cash flow for the new nursery $8,973
Free revenue - (Salaries expense + food and supplies expense) = Net cash flow
$126,048* - (103,813 + 13,886) = $8,349
Annual rate of return 28%
Net income / average annual Investment
($26,435 + 0) / 2 = $13,051 average annual investment
$2,824 / $13,051 = 21.64%
Cash payback period for the new nursery 3.13 years
Investment / Cash flow
$26,435 / $8,344 = 8.95 years
Assuming that Wichita can borrow the money needed for expansion at 10%, compute the net present value of the new room
Present value of net annual cash flows $31,630
Present value of investment 26,101
Positive net present value $5,529
The PV is positive, so Wichita made over 10%.
* $8,344 x 3.79079 (Using tables the present value)
**26,435 x 1.00 = 26,101