Problem: 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