Question

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 $ 75,700 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 $ 3,300, Repairs $ 4,000, Insurance $ 4,200, and Advertising $ 2,510.
4.		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.
5.		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.

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(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.)

Net income		$
Net annual cash flows		$

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			years
Annual rate of return			%

(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.)

Net present value

Answer 1

Calculation of Revenue
No of Vans	5
No of trips per van per week	10
No of weeks	30
No of students per van per trip	6
Ticket charge per student per round trip	12.05
Revenue per year	108,450
Calculation of costs
Payroll	48,010
Gasoline	15,990
Maintenance	3,300
Repairs	4,000
Insurance	4,200
Advertising	2,510
Total costs before depreciation	78,010
Depreciation	25,233
Total Costs per annum	103,243
Annual Revenue	108,450
No of years	3
Total Net Revenue	325,350
Annual Costs including depreciation	103,243
No of years	3
Total cost	309,730
Net Profit (This should tally with cash generated for 3 years)	15,620
Cash Flow
	01/01/2018	31/12/2018	31/12/2019	31/12/2020
Investment	(75,700)
Revenue		108,450	108,450	108,450
Costs		(78,010)	(78,010)	(78,010)
Cashflow	(75,700)	30,440	30,440	30,440
Total Cash Generated (Please see that net profit and cash generated is equal at the end of 3 years)	15,620
Payback period
Investment (a)	75,700
Cash flow per annum (b)	30,440
Payback period (Years) (a/b)	2.486859396
Annual Rate of return	11.77%	Calculated using excel
Net Present value	($5,390.1108)	Calculated using excel. NPV is negative since cost of capital is higher than return