Wendy Dobson is the managing director of the Wichita Day Care Center. Wichita is currently set up as a full-time child care facility for children between the ages of 12 months and 6 years. Wendy is trying to determine whether the center should expand its facilities to incorporate a newborn care room for infants between the ages of 6 weeks and 12 months. The necessary space already exists. An investment of $25,000 would be needed, however, to purchase cribs, high chairs, etc. The equipment purchased for the room would have a 5-year useful life with zero salvage value.

The newborn nursery would be staffed to handle 12 infants on a full-time basis. The parents of each infant would be charged $200 weekly, and the facility would operate 52 weeks of the year. Staffing the nursery would require two full-time specialists and five part-time assistants at an annual cost of $103,800. Food, diapers, and other miscellaneous supplies are expected to total $14,000 annually.

Instructions

(a) Determine

(1) Annual net income and

(2) Net cash flow for the new nursery.

(b) Compute

(1) The annual rate of return and

(2) The cash payback period for the new nursery. (Round to two decimals.)

(c) Assuming that Wichita can borrow the money needed for expansion at 10%, compute the net present value of the new room. (Round to the nearest dollar.)

(d) What should Wendy conclude from these computations?