Ms. Faye Santos is an accounting major at a Midwestern state university located approximately 60 miles from a major city. Ms. Faye Santos is an accounting major at a Midwestern state university...

Ms. Faye Santos is an accounting major at a Midwestern state university located approximately 60 miles  from a major city.

Ms. Faye Santos 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 areas and  visit their homes regularly on the weekends. Faye, an entrepreneur at heart, realizes that few good  commuting alternatives are available for students doing weekend travel. She believes that a weekend  commuting service could be organized and run profitably from several suburban and downtown  shopping mall locations. Faye has gathered the following investment information.

1. 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.


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; and Advertising - $2,500.


3. 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.


4. Faye expects each 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.

Instructions:

1. 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. (Round to two decimals) c. Compute the net present value of the commuter service. (round to the nearest dollar) d. What should Faye conclude from these computations?