Question

'LUS MANGERIAL ACCOUNTING ACCT 111) Weygandt, Managerial Accounting, de CALCULATOR MESSAGE MY INSTRUCTO R EN VER B ACK NEXT Problem 12-2A a-c (Video) 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. Presed vans would cost total of $75,020 to purchase and would have a year useful life with regiile savage wwe Lion plans Ten drivers would have to be employed to payrol pense of $69.700 Other annual out-of-pocket expense cited with running the commuter Service would include Gasoline 16100, M enace 82200, 400, 4000, and Advertising 2.500 Lonas visited several financial institutions to discuss funding. The best interest rate he has been able to negotiates 151 Use this rate for cost of capital Lon expect each van to make to round trips weekly and carry an average of sin students each trip. The service is expected to operate 30 weeks each year and each student will be charged 512 for a round-trip scket Click here to view PV table. (a) Determine the annual (1) net income and (2) net annual cash flows for the commuter service. (Round answers to 0 decimal places, e.g. 125.) Netcome Net al cash flows (b) Compute (1) the cash payback period and (2) the annual rate of return. (Round answers to 2 decimal places, e.g. 10.50.) Cash payback period annual rate of (c) Compute the net present value of the commuter service. (Round answer to 0 decimal places, e.g. 125. If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Mar paaru Click if you would like to show Work for this question: Ben Show Wak Question Attempts Unlimited FORAR BURMIT ANSWER

Answer 1

Initial Cash Outlay:

5 vans                                                       $75,000

Annual Cash Flows:

Revenues* Costs:		$       108,000
Payroll	48,000
Gasoline	16,000
Maintenance	3,300
Repairs	4,000
Insurance	4,200
Advertising	2,500
Total Costs		78,000
Annual Cash Flow		$         30,000
less: Depreciation ($75,000 / 3)		25,000
Annual Income		$           5,000

Terminal Cash Flow:

No salvage value                                               $0

*Revenue Computation per Van:

10 trips per week x 30 weeks = 300 trips per year 300 trips per year x 6 students per trip = 1,800 tickets

1,800 tickets x $12 per ticket =        $

21,600

per van

1. $75,000 initial cash outlay / $30,000 cash flow =                      2.50 years (2 years 6 months) Not acceptable (payback > 2 year required payback)

2. $5,000 annual income / ($75,000 + 0) / 2 avg investment =                           13.33% Not acceptable (AROR < 18% desired ROI)

(c)     Annual Cash Flow	$         30,000
times PVA Factor at 3 years, 15%	2.28323
Discounted Future Cash Flows	$    68,496.90
LESS: Initial Cash Outlay	75,000.00
Net Present Value	$     (6,503.10)
Not acceptable (NPV < zero)
(d)    Initial Cash Outlay	$    75,000.00
divided by Annual Cash Flow	$    30,000.00
PVA Factor at 3 years, IRR	2.50000
IRR Not acceptable (IRR < desired rate of return)	9 - 10%

(e)     Initial Cash Outlay:

5 vans                                                       $75,000

Annual Cash Flows:

Revenues* Costs:		$       108,000
Payroll	48,000
Gasoline	16,000
Maintenance	3,300
Repairs	4,000
Insurance	4,200
Advertising	2,500
Total Costs		78,000
Annual Cash Flow		$         30,000
less: Depreciation ($75,000 / 5)		15,000
Annual Income		$         15,000

Terminal Cash Flow:

No salvage value                                               $0

*Revenue Computation per Van:

10 trips per week x 30 weeks = 300 trips per year 300 trips per year x 6 students per trip = 1,800 tickets

1,800 tickets x $12 per ticket =        $

21,600

per van

(a)     $75,000 initial cash outlay / $30,000 cash flow =                      2.50 years (2 years 6 months) Not acceptable (payback > 2 year required payback)

(b)    $15,000 annual income / ($75,000 + 0) / 2 avg investment =                         40.00% Acceptable (AROR > 18% desired ROI)

(c)     Annual Cash Flow	$         30,000
times PVA Factor at 5 years, 15%	3.35216
Discounted Future Cash Flows	$ 100,564.80
LESS: Initial Cash Outlay	75,000.00
Net Present Value	$    25,564.80
Acceptable (NPV > zero)
(d)    Initial Cash Outlay	$    75,000.00
Annual Cash Flow	$    30,000.00
PVA Factor at 5 years, IRR	2.50000
IRR Acceptable (IRR > desired rate of return)	greater than 20%