Ben Paul is an accounting major at a western 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. Ben, 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 profitably from several suburban and downtown shopping mall locations. Ben has gathered the following investment information.

1. Five used vans would cost a total of $90,000 to purchase and would have a 3-year useful life

with negligible salvage value. Ben plans to use straight-line depreciation.

2. Ten drivers would have to be employed at a total payroll expense of $43,000.

3. Other annual out-of-pocket expenses associated with running the commuter service would

include Gasoline $26,000, Maintenance $4,000, Repairs $5,300, Insurance $4,500,

Advertising $2,200.

4. Ben desires to earn a return of 15% on his investment.

5. Ben expects each van to make ten round trips weekly and carry an average of six students

each trip. The service is expected to operate 32 weeks each year, and each student will be

charged $15 for a round-trip ticket.

Instructions

(a) Determine the annual:

(1) net income and

(2) net annual cash flows for the commuter service.

(b) Compute the:

(1) cash payback period and

(2) annual rate of return. (Round to two decimals.)

(c) Compute the net present value of the commuter service. (Round to nearest dollar.)

(d) What should Ben conclude from these computations?

PROBLEM 26-2B

(a)	(1) Annual Net Income	(2) Annual Cash Flow
Sales
Expenses:
Total Expenses
Net Income
Cash Inflow

(b) (1)	Cash Payback Period =
	Annual Rate of Return =

(c)

(d) Computations show that commuter service is a good investment for because:

Give AT LEAST 3 reasons!