Managerial Accounting: P12-2B Jo Quick is managing director of the Tot Lot Day Care Center

Managerial Accounting

P12-2B
Jo Quick is managing director of the 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 facilities to incorporate a newborn care room for infants between the ages of 6weeks and 12 months. The necessary space already exists. An investment of $20,000 would be needed, however, to purchase cribs, high chairs, etc. The equipment purchased for the room would have a 5 year useful life with zero salvage value.
The newborn nursery should be staffed to handle 11 infants on a full time basis. 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 specialists and five part time assistants at an annual cost of $60,000. Food, diapers and other miscellaneous supplies are expected to total $6000 annually.

Instructions
a. Determine (annual) net income and (2) net annual cash flow 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 decimals
c. Compute the net present value of incorporating a newborn care room. (Round to the nearest dollar) Tot lot's cost of capital is 10%.
d. What should Jo Quick conclude from these computations?
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