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Managerial Accounting: Rate of Return, Cash Payback, and NPV

P12-2B Compute annual rate of return, cash payback, and net present value.

Jo Quick is managing director of Tot Lot Day Care Center. Tot Lot is currently set up as a full-time child care facility for children between the ages of 12 months and 6 years. Jo Quick is trying to determine whether the center should expand its facility 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 $20,000 would be needed, however to purchase cribs, high chairs, etc. The parents of each infant would be charged $125, weekly, and the facility would operate 52 weeks of the year. Staffing the nursery would require two full-time specialist and five part-time assistants at an annual cost of $60,000. Food, diapers, and other miscellaneous supplies are expected to total $6,000 annually.

Instructions

(a) Determine (1) Annual net income and (2) net annual cash flows for the new nursery
(b) Compute (1) the cash payback period for the new nursery and (2) the annual rate of return (Round to two decimal places
(c) Compute the net present value of incorporating a newborn care room. (Round to nearest dollar) Tot Lot's cost of capital is 10%
(d) What should Jo Quick conclude from the computations?

Solution Preview

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Problem 12-2B
Calculating annual rate of return, cash payback, and net present value.

(a)
Annual Net Annual
Net Income Cash Flows
Fee Revenue (11 x $125 x ...

Solution Summary

This solution is comprised of a detailed step-by-step explanation of how to calculate the following: (1) annual rate of return, (2) cash payback and (3) net present value. The solution also describes what should be concluded from these computations. The problem shown here is taken from Managerial Accounting, 4th ed., Wiley Publishing, however, the detail step-by-step explanation of these topics provides students with a clear understanding of the concepts.

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