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 $75,800 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 $47,992. 3. Other annual out-of-pocket expenses associated with running the commuter service would include Gasoline $16,007, Maintenance $3,298, Repairs $4,006, Insurance $4,198, Advertising $2,500. 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 $12.03 for a round-trip ticket. 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.) Compute (1) the cash payback period and (2) the annual rate of return. (Round answers to 2 decimal places, e.g. 10.50.) Compute the net present value of the commuter service. (Round answers 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).)

Answer 1

1
Revenue(10*6*30*12.03*5)		$ 108,270
Less: Cost
Driver's salary	$        47,992
Gasoline	$        16,007
Maintainance	$          3,298
Repairs	$          4,006
Insurance	$          4,198
Advertising	$          2,500
Depreciation(75800/3)	$        25,267
Total Cost		$ 103,268
Net Income		$      5,002

2
Net Income	$          5,002
Add: Depreciation	$        25,267
Annual Cash inflows	$        30,269

3
Payback Period	=	Investment	/	Annual Cash inflows
Payback Period	=	$                75,800	/	$                         30,269
Payback Period	=	2.50

4 annual rate of return = Net Income / Average Investment annual rate of return = $                  5,002 / $                         37,900 annual rate of return = 13.20%

5
Present Value of Inflows	=	30269*2.28323		$                         69,111
Investment				$                         75,800
Net present Value				$                         (6,689)

Year	PV Factor
1	0.86957
2	0.75614
3	0.65752
Annuity Factor	2.28323

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