Ellen Jackson 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 area and visit their homes regularly on the weekends. Ellen, 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. Ellen has gathered the following investment information.

1. Six used vans would cost a total of $96,000 to purchase and would have a 3-year useful life with negligible salvage value. Ellen plans to use straight-line depreciation.

2. Ten drivers would have to be employed at a total payroll expense of $70,000.

3. Other annual out-of-pocket expenses associated with running the commuter service would include Gasoline $28,000, Maintenance $2,800, Repairs $3,500, Insurance $3,200, Advertising $1,500. (Exclude interest expense.)

4. Ellen has visited several financial institutions to discuss funding for her new venture.

The best interest rate she has been able to negotiate is 10%. Use this rate for cost of capital.

5. Ellen expects each van to make ten round trips weekly and carry an average of five students each trip. The service is expected to operate 30 weeks each year. Each student will be charged $16.00 for a round-trip ticket.

Instructions

(a) Determine the annual

(1) Net income, and

(2) Net cash flow for the commuter service.

(b) Compute

(1) The annual rate of return, and

(2) The cash payback period. (Round to two decimals.)

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

(d) What should Ellen conclude from these computations?