Problem 23-5A Cindy Justus is the managing director of the Wichita Day Care Cent

Question

Problem 23-5A
Cindy Justus is the managing director of the Wichita Day Care Center. Wichita is currently set up as a full-time child care facility for children between the ages of 12 months and 6 years. Cindy is trying to determine whether the center should expand its facilities to incorporate a newborn care room for infants between the ages of 6 weeks and 12 months. The necessary space already exists. An investment of $25,920 would be needed, however, to purchase cribs, high chairs, etc. The equipment purchased for the room would have a 5-year useful life with zero salvage value.

The newborn nursery would be staffed to handle 12 infants on a full-time basis. The parents of each infant would be charged $215 weekly, and the facility would operate 52 weeks of the year. Staffing the nursery would require two full-time specialists and five part-time assistants at an annual cost of $100,200. Food, diapers, and other miscellaneous supplies are expected to total $12,600 annually.

Determine annual net income and net cash flow for the new nursery.

Annual Net Income: 16176
Annual Cash Flow: 21360

Collapse question part
(b)
Compute (1) the annual rate of return and (2) the cash payback period for the new nursery. (Round answers to 2 decimal place, e.g. 23,70% or 6.50.)

(1) Annual rate of return
%
(2) Cash payback period
years

Explanation / Answer

Answer:b)

1) Calculation of Annual Rate of Return:

Annual Rate of Return= Annual net income/ Average annual investment

Average annual investment = (Initial investment + Salvage value)/2

= (25920+0)/2 = 12960

Annual Rate of Return= 16176/12960

= 124.81%

2) Calculation of Cash payback period :

Cash payback period = Initial investment/ Annual cash flow

= 25920 / 21360

= 1.21 years

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