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Compute the net present value of the commuter service

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Reference no: EM132896550

Problem - Five used vans would cost a total of 75,000 to purchase and would have a three year useful life with negligible salvage value. Faye plans to use straight line depreciation.

Ten drivers would have to be employed at a total payroll expense of 48,000.

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, and advertising 2,500.

Faye has visited several financial institutions to discuss funding. The best interest rate she has been able to negotiate is 15%. Use this rate for cost of capital.

Faye expects eacg van to make 10 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.

a. Determine the (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.

c. Compute the net present value of the commuter service.

d. What should Faye conclude from these computations?

Reference no: EM132896550

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