Please help!!!!! Lon Timur is an accounting major at a midwestern state universi
ID: 2545225 • Letter: P
Question
Please help!!!!!
Lon Timur is an accounting major at a midwestern state university locatedapproximately 60 miles from a major city. Many of the students attendingtheuniversity are from the metropolitan area and visit their homes regularly on the weekend. Lon, an entrepeneur, realizes that few good commuting alternatives areavailable for students doing weekend travel. He believes that a weekend commutingservice could be organized and run profitably from several suburban and downtownshopping mall locations. Lon has gathered the following investment information:
1. Five used vans would cost a total of $75,000 to purchase and would have a 3-yearuseful life with negligible salvage value. Lon plans to use straight-line depreciation.
2.Ten drivers would have to be employed at a total payroll cost of $48,000annually.
3. Other annual out-of-pocket costs associated with running the commuter service would include Gasoline $16,000, Maintenance $3,300, Repairs $4,000, Insurance$4,200, and Advertising $2,500.
4. Lon has visited several financial institutions to discuss funding. The best interestrate he has been able to negotiate is 15%. Use this rate for cost of capital.
5. Lon expects each van to make ten round trips WEEKLY and carry an average of six students each round trip.The service is expected to operate 30 weeks each year, and each student will be charged $12 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 (1) the cash payback period and (2) the annual rate of return (round to two decimals)
Explanation / Answer
Answer
A.
The annual (1) net income and (2) net annual cash flows for the commuter service:
B.
1.
Cash payback period = Investment / Annual cash flows
=75000/66750
= 1.12 years
2.
Annual rate of return = Net income / Investment*100
=41750 / 750000*100
=55.67%
Particulars Amount Amount Net Income: Revenue(10*30*5*6*12) 108000 Expenses: Gasoline 16000 Maintenance 3300 Repairs 4000 Insurance 4200 Advertising 2500 Interest on loan(75000*15%) 11250 Depreciation (75000/3) 25000 Total cost 66250 Net income 41750 Net annual cash flows Net income 41750 Add:Depreciation 25000 Annual cash flows 66750