Question

Assignment Gradebook WANAGERIAL AC ORION Downloadable eTextbook CALCULATOR MESSAGE MY INSTRUCTOR FULL SCREEN PRINTER VERSION (BAC 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. Man 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 $75,000 to purchase and would have a 3-year useful life with negligible salvage value. Lon plans to use straight-line depreciation. Ten drivers would have to be employed at a total payroll expense of $48,000. Other annual out-of-pocket expenses associated with running the commuter service would include Gasoline $16,000, Maintenance $3,300, Repairs $4,000, Insurance $4,200, and Advertising $2,500. on 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 for a round-trip ticket Click here to view PV table. (a) Determine the annual (1) net income and (2) net annual cash flows for the commuter service. (Round answer decimal places, e.g. 125.) Net Income Net annual cash flows

Answer 1

a)

i). Net Income ;-

Particulars	Amount($)	Amount($)
Annual Revenue(10*30*6*12)*5		108000
Less : Operating Expenses
Salary	48000
Out of Pocket Expenses	16000
Maintenance	3300
Repairs	4000
Insurance	4200
Advertising	2500
Depreciation ($75000/3)	25000
Total Operating Expenses	103000	(103000)
Net Income		5000

ii). Annual Cash Flow :-

= Net Income + Depreciation

= $5000 + $25000

= $30000

b)

i). Pay back period :-

= Investment / Annual Cash Inflow

= $75000 / $30000

= 2.5 Years

ii). Annual Rate of Return :-

= Net income / Avg. Investment

= $5000 / (($75000+0)/2)

= $5000 / $37500

= 13.33%

c) Net Present Value :-

Year	Cash Flow	PV Factor@15%	Present Value of Cash Flow
0	$(75000)	1	($75000)
1	$30000	0.86956	$26086.8
2	$30000	0.75614	$22684.2
3	$30000	0.65751	$19725.3
		Total Net Present Value	(6503.7) or (6504)