8. Pedro’s Tree Trimming Business. Pedro is developing a business plan and an application for financing for a tree-trimming business that he intends to start. He will run the service for 5 years and then dissolve it. He has developed the following information on various aspects of this business:

• Truck costs: Pedro plans on buying two new Ford F-150 trucks for the business, which can be purchased for $24,000 each. This cost includes taxes and fees at purchase. The resale value for a truck after 5 years is estimated at $8,000. The following describes the annual operating costs for a single truck: Annual insurance cost is $1,200 and annual license and inspection fees are

$100. Maintenance cost is $400 in the first year and increases by $200 in each subsequent year. The cost of repairs is zero for the first 2 years and will be $200 in the third year. In subsequent years, the cost will grow by $200 per year.

• Fuel costs: Fuel costs are $0.15/mile. In addition to job mileage, each truck will be driven 2,000 miles a year.

The round trip to each job averages 20 miles.

• Shredders: In addition to trucks, Pedro must purchase wood shredders. He needs one shredder that costs

$5,000. The shredder must be replaced at the beginning of the third year for a cost of $5,000. Shredders have no resale value.

• Labor: Each job requires two trimmers for an 8-hour day and $50 in supplies. Tree trimmers earn $15 an hour. The workers are hired hourly. Overhead (office, phone, secretary, etc.) for running the business is 40 percent of the trimmer labor cost. Pedro will be the manager with an annual salary of $30,000.

• Demand: The demand for service is expected to be 250 jobs per year. The fee per job is $650.

Based on this information, develop a model to project financial statements for Pedro’s Tree Trimming. The bank usually wishes to see the following components for financial performance on an annual basis and over the 5-year period: total revenue, total costs, profits, and annual cash flow. The cash flow can also be used to develop a net present value of the investment. Use a discount rate of 15 percent (0.15). With Planners Lab software’s graphics facilities, it is easy to present results in graphical form.

Submit a copy of your model and financial projections in tabular as well as graphical form. (Acknowledgment: This exercise is adapted from an exercise prepared by Prof.

Paul Jensen of University of Texas-Austin.)