Stuck on this problem! Problem 24-2A Lon Timur is an accounting major at a midwe
ID: 2600061 • Letter: S
Question
Stuck on 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. Five used vans would cost a total of $75,700 to purchase and would have a 3-year useful life with negligible salvage value. Lon plans to use straight-line depreciation 1. 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 $3,300, Repairs $4,000, Insurance $4,200, and Advertising $2,510 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 $12.05 for a round-trip ticket. 4, 5. Click here to view PV table. Determine the annual (1) net income and (2) net annual cash flows for the commuter service. (Round answers to O decimal places, e.g. 125.) Net income Net annual cash flowsExplanation / Answer
Answer a Calculation of annual net Income Revenue (30 weeks * 10 round trips * 6 students * $12.05 per round trip ) $108,450 Less : Expenses - Payroll $48,010 - Gasoline $15,990 - Maintenance $3,300 - Repairs $4,000 - Insurance $4,200 - Advertising $2,510 - Depreciation $25,233 Net income $5,207 Net Annual Cash flows = Net Income + Depreciation = $5207 + $25233 = $30,440 Answer b Cash Payback period = Initial investment / Net Annual cash flow = $75700 / $30440 = 2.48 years Annual rate of return = Net Income / Initial Investment = $5207 / $75700 = 6.88% Answer c Calculation of Net Present Value Year 0 1 2 3 NPV Initial Investment in old trucks -$75,700 Net Annual Cash flows $30,440 $30,440 $30,440 Net Cash flows -$75,700 $30,440 $30,440 $30,440 Discount rate @ 15% 1 0.8695652 0.7561437 0.6575162 Present Values -$75,700.00 $26,469.57 $23,017.01 $20,014.79 -$6,198.63 Net Present Value -$6,198.63