Cindy's Limo Service provides transportation services in and aroundMiddleville. Its profits have been declining, and management is planningto add a package delivery service that is expected to increase revenueby $275,000 per year. The total cost to lease additional delivery vehiclesfrom the local dealer is $60,000 per year. The present manager willcontinue to supervise all services. Due to expansion, however, the laborcosts and utilities will increase by 40%. Rent and other costs willincrease by 15%.Cindys Limo ServiceAnnual Income StatementBefore ExpansionSales revenueCosts:Vehicle leasesLabor$ 9,60,0004,00,000UtilitiesRentOther costsManagers salaryTotal costs2,90,00050,0001,00,00060,0001,20,000$ 10,20,000-$60,000Operating profit (loss)What are the total differential costs that will be incurred as a result ofthe expansion?

To calculate the total differential costs resulting from the expansion, we need to account for costs…

Answered: Cindy's Limo Service provides…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter21: Risk Management

Section: Chapter Questions

Problem 5P

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Kevin's Transportation provides services in Greater Cincinnati. Management is concerned because the company's profits have been declining, so they are planning to add a delivery service that is expected to increase revenue by $285,000 per year. The total cost to lease additional vehicles from a local dealer is $75,000 per year. The current manager will continue to supervise all daily operations. Labor and utilities costs will increase by 40% and rent and other costs will increase by 15% when the new service is added. Kevin's Transportation Annual Income Statement Before New Service Sales Revenue Costs: Vehicle Leases Labor Utilities Rent Other Costs Manager's Salary Total Costs Operating Profit (Loss) $ 400,000 290,000 50,000 100,000 60,000 120,000 $ 960,000 1,020,000 $ (60,000) a. Prepare a report of the differential costs and revenues if the delivery service is added, b. Should management start up the delivery service? Explain your answer.
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Philadelphia Swim Club is planning for the coming year. Investors would like to earn a 10% return on the company's $30 million of assets. The company primarily incurs fixed costs to maintain the swimming pools. Fixed costs are projected to be $12,500,000 for the year. About 500,000 members are expected to swim each year. Variable costs are about $10 per swimmer. Philadelphia Swim Club won't be able to charge more than its competitors who charge $37.00 for a membership. What profit (loss) will it earn in terms of dollars? Select one: a. $(12,500,000) b. $11,000,000 c. $1,000,000 d. $2,500,000 e. $(1,000,000)
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eEgg is considering the purchase of a new distributed network computer system to help handle its warehouse inventories. The system costs $50,000 to purchase and install and $32,000 to operate each year. The system is estimated to be useful for 4 years. Management expects the new system to reduce the cost of managing inventories by $58,000 per year. The firm’s cost of capital (discount rate) is 11%. a.The firm is not yet profitable and therefore pays no income taxes. b.The firm is in the 26% income tax bracket and uses straight-line (SLN) depreciation with no salvage value. Assume MACRS rules do not apply. c. The firm is in the 26% income tax bracket and uses double-declining-balance (DDB) depreciation with no salvage value. Given a four-year life, the DDB depreciation rate is 50% (i.e., 2 × 25%). In year four, record depreciation expense as the net book value (NBV) of the asset at the start of the year. 1. What is the internal rate of return (IRR) of the proposed investment for…
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