Cindy Justus is the managing director of the Wichita Day Care Center. Wichita is

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 $26,690 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 $216 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 $101,400. Food, diapers, and other miscellaneous supplies are expected to total $12,400 annually.

(a) Determine annual net income and net cash flow for the new nursery

***HELP WITH QUESTIONS (B) & (C)

(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.)

(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

B Annual Rate of Return= Net Income/Initial Investment*100 15646/26690*100 58.6212064 Cash Payback Period=Initial Inv/Annual Cash Flow 26690/20984 1.27192146 Years 1.27 Years C Present Value Year Cash Inflows DcF @ 10% Discounted Cash Flow 1 20984 0.90909091 19076.36364 2 20984 0.82644628 17342.14876 3 20984 0.7513148 15765.58978 4 20984 0.68301346 14332.35435 5 20984 0.62092132 13029.41304 Less Cash Outflow at Year0 -26690 Present Value 52855.86957

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