Please solve this problem Problem 24-2A Lon Timur is an accounting major at a mi
ID: 2559442 • Letter: P
Question
Please solve this problem
Problem 24-2A 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. 1 Five used vans would cost a total of $75,400 to purchase and would have a 3-year useful life with negligible salvage value. Lon plans to use straight-line depreciation. 2. Ten drivers would have to be employed at a total payroll expense of $48,010 3. Other annual out-of-pocket expenses associated with running the commuter service would include Gasoline $15,990, Maintenance $3,310, Repairs $3,990, Insurance $4,200, and Advertising $2,510. Lon has visited several nancial institutions to discuss funding. The best interest rate he has been able to negotiate is 15% Use this rate or cost or 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 4. 5. charged $11.95 for a round-trip ticket. Determine the annual 1) net income and 2) net annual cash flows or the comm uter service (Round answers t 0 decima races e. 2s.) Net income Net annual cash flowsExplanation / Answer
Answer: A.Net Income and Annual Cash Flow
Particular
Amount
Total Revenue (5*10*30*6*11.95) A
107550
Total Expenses (48010+15990+3310+3990+4200+2510) B
78010
Net annual cash flow (A-B)
29540
B. Cash Payback Period
Formula= Initial investment/ Annual Cash Flow
= 75400/29540= 2.55 years
Net Present Value
Particular
Time
PVF @ 15
Amount
Present Value
Cost Of Vans
0
1
-75400
-75400
Annual Cash Flows
1
0.869
29540
25670.26
2
0.756
29540
22332.24
3
0.657
29540
19407.78
Net Present Value
-7989
Annual Rate Of return
NPV at 15% Rate is -7982
Using 8% as a discount rate: NPV Is
Particular
Time
PVF @8 %
Amount
Present Value
Cost Of Vans
0
1
-75400
-75400
Annual Cash Flows
1
0.926
29540
27354.04
2
0.857
29540
25315.78
3
0.794
29540
23454.76
Net Present Value
725
Rate= lower rate+ {(npv at lower rate/npv at lower rate –npv at higher rate)*difference in rates}
= 8+ {(725/725-(-7982))}*15-8
= 8+ {(725/725+7982)*7
=8.58 (Annual Rate Of Return)
Thanks
Particular
Amount
Total Revenue (5*10*30*6*11.95) A
107550
Total Expenses (48010+15990+3310+3990+4200+2510) B
78010
Net annual cash flow (A-B)
29540