Problem 24-2A Lon expects each van to make ten round trips weekly and carry an a

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Problem 24-2A

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 $11.99 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.)

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.
1. Five used vans would cost a total of $74,700 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 $47,999. 3. Other annual out-of-pocket expenses associated with running the commuter service would include Gasoline $16,000, Maintenance $3,291, Repairs $3,994, Insurance $4,200, Advertising $2,491. 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.

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 $11.99 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.)

Net income $ Net annual cash flows $

Explanation / Answer

no of vans trip in a week per trip studnets no of trips in a year per trip sper student charges total Revenue 5 10 6 30 9000 11.99 107910 Payroll expense 47999 Gasoline 16000 cost of vans 74700 Maintenance 3291 life of vans 3 Repairs 3994 annual depreciation 24900 Insurance 4200 advertising 2491 depreciation 24900 102875 interst on Net income 5035 total revenue 107910 total of expenses 102875 Net income 5035 depreciation 24900 Annual net cash flow 29935

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