A group of IT students are planning to run a tuition centre and expecting to earn 18% return from the business. Duration of the business is 5 years. They have estimated the expenditures and income as follows, Initial Investment Rs. 2.5 million rupees. Residual value at the end of 5 years is Rs. 800,000. First year sales income is Rs. 2 million. It is expected to increase by Rs. 1 million per year up to 5 years. Payments for tutors are 50% of the annual sales income. First Year Admin Expenses are Rs. 200,000, where these are expected to increase by Rs. 100,000 per year up to 5 years. First Year Promotional Expenditures would be Rs. 400,000, where it is expected to increase by Rs. 100,000 per year up to 5 years. Other expenditures are Rs. 100,000 per year and will remain unchanged year to year. Tax rate 20%. After showing clearly the payback period calculation including cumulative cash flows, explain what you would recommend to the owners of this business, if they are expecting a return of 15% on their investment.
A group of IT students are planning to run a tuition centre and expecting to earn 18% return from the business. Duration of the business is 5 years. They have estimated the expenditures and income as follows, Initial Investment Rs. 2.5 million rupees. Residual value at the end of 5 years is Rs. 800,000. First year sales income is Rs. 2 million. It is expected to increase by Rs. 1 million per year up to 5 years. Payments for tutors are 50% of the annual sales income. First Year Admin Expenses are Rs. 200,000, where these are expected to increase by Rs. 100,000 per year up to 5 years. First Year Promotional Expenditures would be Rs. 400,000, where it is expected to increase by Rs. 100,000 per year up to 5 years. Other expenditures are Rs. 100,000 per year and will remain unchanged year to year. Tax rate 20%. After showing clearly the payback period calculation including cumulative cash flows, explain what you would recommend to the owners of this business, if they are expecting a return of 15% on their investment.
Managerial Accounting
15th Edition
ISBN:9781337912020
Author:Carl Warren, Ph.d. Cma William B. Tayler
Publisher:Carl Warren, Ph.d. Cma William B. Tayler
Chapter12: Capital Investment Analysis
Section: Chapter Questions
Problem 4TIF
Related questions
Question
Please Show All Workings Very Clearly, and Do NOT use handwritten answers!
A group of IT students are planning to run a tuition centre and expecting to earn 18% return from the business.
Duration of the business is 5 years.
They have estimated the expenditures and income as follows,
- Initial Investment Rs. 2.5 million rupees.
- Residual value at the end of 5 years is Rs. 800,000.
- First year sales income is Rs. 2 million. It is expected to increase by Rs. 1 million per year up to 5 years.
- Payments for tutors are 50% of the annual sales income.
- First Year Admin Expenses are Rs. 200,000, where these are expected to increase by Rs. 100,000 per year up to 5 years.
- First Year Promotional Expenditures would be Rs. 400,000, where it is expected to increase by Rs. 100,000 per year up to 5 years.
- Other expenditures are Rs. 100,000 per year and will remain unchanged year to year.
- Tax rate 20%.
After showing clearly the payback period calculation including cumulative cash flows, explain what you would recommend to the owners of this business, if they are expecting a return of 15% on their investment.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 3 steps with 1 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Managerial Accounting
Accounting
ISBN:
9781337912020
Author:
Carl Warren, Ph.d. Cma William B. Tayler
Publisher:
South-Western College Pub
Cornerstones of Cost Management (Cornerstones Ser…
Accounting
ISBN:
9781305970663
Author:
Don R. Hansen, Maryanne M. Mowen
Publisher:
Cengage Learning
Principles of Accounting Volume 2
Accounting
ISBN:
9781947172609
Author:
OpenStax
Publisher:
OpenStax College
Managerial Accounting
Accounting
ISBN:
9781337912020
Author:
Carl Warren, Ph.d. Cma William B. Tayler
Publisher:
South-Western College Pub
Cornerstones of Cost Management (Cornerstones Ser…
Accounting
ISBN:
9781305970663
Author:
Don R. Hansen, Maryanne M. Mowen
Publisher:
Cengage Learning
Principles of Accounting Volume 2
Accounting
ISBN:
9781947172609
Author:
OpenStax
Publisher:
OpenStax College