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Lon Timur 75000

Price: $2.50


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 profi tably from several suburban and downtown shopping mall locations.
Lon has gathered the following investment information.

1. Five used vans would cost a total of $75,000 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 $48,000.

3. Other annual out-of-pocket expenses associated with running the commuter service
would include Gasoline $16,000, Maintenance $3,300, Repairs $4,000, Insurance
$4,200, Advertising $2,500.

4. Lon has visited several fi nancial 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 $12.00 for a round-trip ticket.

Instructions

(a) Determine the annual (1) net income and (2) net annual cash fl ows 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.)

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