Determine the annual net income and net annual cash flows

Assignment Help Accounting Basics

Reference no: EM131908328

Problem

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.

1. Five used vans would cost a total of $74,200 to purchase and would have a 3-year useful life with negligible salvage value. Lon plans to use straight-line depreciation.

2. Ten drivers would have to be employed at a total payroll expense of $48,010.

3. Other annual out-of-pocket expenses associated with running the commuter service would include Gasoline $16,010, Maintenance $3,290, Repairs $4,010, Insurance $4,210, and Advertising $2,510.

4. 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.

5. 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 $12.05 for a round-trip ticket.

(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.

Reference no: EM131908328

Questions Cloud

What are some key things to consider before investing : What are some key things to consider before investing? At least 5 points of consideration.

What is the amount that ding would receive from liquidation : A local partnership was considering the possibility. If the assets could be sold for $228,000, what is the amount that Ding would receive from the liquidation?

Define the two types of risk : Define the two types of risk, explain the difference, and give two examples of each type of risk.

Write a short essay on the use of the bootstrapping method : Explain how heteroscedasticity robust standard errors can be obtained in the context of linear regression models. State carefully any assumptions you may have

Determine the annual net income and net annual cash flows : Determine the annual net income and net annual cash flows for the commuter service. Compute the cash payback period and the annual rate of return.

Buying a machine that will cost you : You are considering buying a machine that will cost you $11,500. There will be a maintenance cost of $850 at the beginning of each year

What is minimum amount that dings creditors have received : If the assets could be sold for $228,000, what is the minimum amount that Ding's creditors would have received? Show all work.

Discuss a monopolist for the contemplated public use : What if the government needs to purchase a single, large piece of property in order to provide a public good, say, a satellite-tracking station?

Substainable growth rate : What are the consequences for a firm that grows a higher rate than its SGR?

User Account

All Pages