Cindy Justus is the managing director of the Wichita Day Care Center. Wichita is
ID: 2490264 • Letter: C
Question
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 $Entry field with correct answer
16176
Annual Cash Flow $Entry field with correct answer
21360
(b)
Correct answer. Your answer is correct.
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 Entry field with correct answer
124.81
%
(2) Cash payback period Entry field with correct answer
1.21
years
(c)
Assuming that Wichita can borrow the money needed for expansion at 10%, compute the net present value of the new room. (Round PV factor to 5 decimal places, e.g. 1.25356 and final answer to 0 decimal places, e.g.1,255.)
Net present value $ ____
Explanation / Answer
Answer a
Net Income =>Free revenue - (Salaries expense + food and supplies expense + Depreciation expense)
=> (52*12 *$215) - (100200 + 12600 + (25920 /5) )
=> $134160 - ( 102000 + 12600 + 5184)
Annual Net income => $16176
Answer b
Annual cash Flow => $16176 + 5184 => $21360
Answer 1
Annual rate of return => Net income / average annual Investment
=> [16176 / (25920 /2) ] *100
Annual rate of return => 124.81 %
Answer 2
Cash payback period=> Investment / Cash flow
=> 25920 / 21360
Cash payback period => 1.21 Years
Answer c
NPV => (21360 * PVIAF(10%, 5) ) - 25920
Net present value => $ 55051.27
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