Ben Paul is an accounting major at a western 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. Ben, 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. Ben has gathered the following investment information.
1.Five used vans would cost a total of $90,000 to purchase and would have a 3-year useful life with negligible salvage value. Ben plans to use straight-line depreciation.
2.Ten drivers would have to be employed at a total annual payroll expense of $43,000.
3.Other annual out-of-pocket expenses associated with running the commuter service would include Gasoline $26,000, Maintenance $4,000, Repairs $5,300, Insurance $4,500, and Advertising $2,200.
4.Ben desires to earn a return of 15% on his investment.
5.Ben expects each van to make ten round trips weekly and carry an average of six students each trip. The service is expected to operate 32 weeks each year, and each student will be charged $15 for a round-trip ticket.
Instructions
(a)Determine the annual (1) net income and (2) net annual cash flows for the commuter service.
(b)Compute (1) the cash payback period and (2) the annual rate of return. (Round to two decimals.)
(c)Compute the net present value of the commuter service. (Round to the nearest dollar.)
(d)What should Ben conclude from these computations?
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