Cindy Justus is the managing director of the Wichita Day Care Center. Wichita is
ID: 2454783 • Letter: C
Question
Cindy Justus is the 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 $24,170 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 $213 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 $102,300. Food, diapers, and other miscellaneous supplies are expected to total $13,300 annually.
(a)
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(b)
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(c)
Cindy Justus is the 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 $24,170 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 $213 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 $102,300. Food, diapers, and other miscellaneous supplies are expected to total $13,300 annually.
Explanation / Answer
(a) Annual net income
Revenue (12 *213 *52)
(-) Costs ( 102300 + 13300)
132912
115600
Annual net income
17312
(b) Annual rate of return = Accounting profit / Investment * 100
= 17312 / 24170 *100
= 71.63 %
Cash Pay-back period = Intitial investment / Annual cash inflow
= 24170 / 17312
= 1.40 Years (approx)
(C) NPV = P.V. of Cash inflow - P.V. of Cash outflow
= 65630(NOTE 1) - 24170
= 41460
(NOTE 1) = P.V. of Cash inflow = 17312 * 3.791(Cumulative Present value factors @ 10% for 5 years)
= 65630 (approx)
Revenue (12 *213 *52)
(-) Costs ( 102300 + 13300)
132912
115600
Annual net income
17312