1. Compute the net investment required to establish the collection subsidiary.

2. Compute the annual net cash flows over the 10-year life of the project.

3. Compute the net present value of this project assuming it is an average-risk investment.

4. Should ZeeBancorp invest in the new subsidiary?

5. ZeeBancorp requires all expansion projects such as this to have a payback of four years or less. Under these conditions, should ZeeBancorp invest in the new subsidiary?

6. If management decides that this project has above-average risk and hence the required return is 20 percent, should the investment be made?

7. If collections are only 80 percent of projections and the required return is 20 percent, should the investment be made?

8. If operating (excluding depreciation) and lease expenses are expected to increase at an annual rate of 13 percent, should the collection subsidiary be established, assuming a required return of 20 percent and the original revenue projections?

ZeeBancorp is considering the establishment of a contract collection service subsidiary that would provide collection services to small- and medium-size firms. Compensation would be in the form of a percentage of the amount collected. For amounts collected up to $100, the fee is 55 percent of the amount collected. For amounts collected between $100 and $500, the fee would be 40 percent of the total amount collected on the account. For amounts collected over $500, ZeeBancorp would receive 35 percent of the total amount collected on the account.

ZeeBancorp expects to generate the following amount of business during the first year of operation of the newsubsidiary:

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Account Class Up to $100 Between $100 an Over $500 Number of Collections 4,800 2,100 1,250 Average Amount Collected for Each Account $ 75 $325 $850 $500