Problem 24-2A Your answer is partially correct. Try again. Lon Timur is an accou

Question

Problem 24-2A Your answer is partially correct. Try again. 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. Five used vans would cost a total of $74,300 to purchase and would have a 3-year useful life with negligible salvage value. Lon plans to use straight-line depreciation. Ten drivers would have to be employed at a total payroll expense of $47,990 Other annual out-of-pocket expenses associated with running the commuter service would include Gasoline $16,010, Maintenance $3,310, Repairs $4,010, Insurance $4,200, and Advertising $2,490. 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 $12.00 for a round-trip ticket. 1. 2. 3. 4, 5. abl Determine the annual (1) net income and (2) net annual cash flows for the commuter service. (Round answers to O decimal places, e.g 125.) Net income 5223 Net annual cash flows29990

Explanation / Answer

a)

b)

c)

Net Income 5224 Net annual Cash Flow 29990 Working Net Income= (5 *6*12.00*10*30) - 47990-16010-3310-4010-4200-2490-74300/3 108000-102776 5224 Net Annual Cash Flow 5224+74300/3 Net Annual Cash Flow 29990

b)

Cash Payback period 2.48 years Annual rate of Return 7.03% Working Cash Payback Period = 74300/29990 Cash Payback Period = 2.48 Annual Rate of Return 5224/74300 Annual Rate of Return 7.03%

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