Question

Balloons By Sunset (BBS) is considering the purchase of two new hot air balloons so that it can expand its desert sunset tours. Various information about the proposed investment follows: (Euture Value of $1. Present Value of $1. Euture Value Annuity of $1. Present Value Annuity of $1) (Use appropriate factor(s) from the tables provided.) Initial investment (for two hot air balloons) Useful life Salvage value Annual net income generated 8BS's cost of capital $ 449,000 9 years $ 44,000 40,410 9% Assume straight line depreciation method is used. Required: Help 8BS evaluate this project by calculating each of the following 1. Accounting rate of return. (Round your answer to 2 decimal places.) 2. Payback period. (Round your answer to 2 decimal places.) 3. Net present value (NPV). (Do not round intermediate calculations. Negative amount should be indicated by a minus sign. Round the final answer to nearest whole dollar.) 4. Recalculate the NPV assuming BBS's cost of capital is 12 percent. (Do not round intermediate calculations. Negative amount should be indicated by a minus sign. Round the final answer to nearest whole dollar.) 1 Accounting rate of return 2 Payback period 3. Net present value 4 Net present value assuming 12 % cost of capital years

Answer 1

1 Requirement 1 2 Accounting rate of return =Annual net income Initial investment =$40,410 $4,49,000 =9% Working notes: 12 Computation of annual cash flows 13 Particulars Amount 14 1.Annual net income $ 40,410 15 2.Annual Depreciation $ 45,000 16 [(449000-44000) 9] 17 3.Annual cash flows $ 85,410 18 (40410+45000) 19 20

Amount 40,410 45,000 $ A 13 Particulars 14 1.Annual net income 15 2. Annual Depreciation 16 [(449000-44000)/9] 17 3.Annual cash flows 18 (40410+45000) 19 20 21 Requirement 2 22 Payback period $ 85,410 =Initial investment Annual cash flows =$4,49,000 $85,410 =5.25

31 Net present value 33 Year 1-9 9th year particulars Amount PV factor @9% Discounted cash flows initial investment $ -4,49,000 -4,49,000 Annual cash flows $ 85,410 5.9952 $ 5,12,050 Salvage value $ 44,000 0.46047 $ 20.261 Net present value 83,311 Year PV @9% lalu 0.9174 0.8417 0.7722 0.7084 0.6499 0.5963 0.5470 0.5019 0.4604 5.9952 49 Cummulative PV

B C D F 31 Net present value 32 33 Year 34 0 1-9 9th year 35 particulars Amount PV factor @9% initial investment - 449000 1 Annual cash flows 85410 5.9952 Salvage value 44000 0.46047 Net present value Discounted cash flows =+C34*D34 =+C35*D35 =+C36*D36 =SUM(E34:E36) 36 38 39 Year 40 1 41 2 42 3 43 4 44 5 45 6 46 7 47 8 48 9 49 Cummulative PV so PV @9% =1/1.0941 =1/1.09 2 =1/1.09-3 =1/1.0944 =1/1.0945 =1/1.09 6 =1/1.0947 =1/1.09 8 =1/1.09 9 =SUM(B40:B48)

54 51 Requirement 4 52 Net present value when cost of capital is 12% 53 Year particulars Amount PV factor @ 12% Discounted cash flows initial investment $-4,49,000 -4,49,000 Annual cash flows $ 85,410 5.3282 $ 4,55,082 9th year Salvage value $ 44,000 0.3606 $ 15,866 Net present value 21,948 Year PV @ 12% lalun 0.8929 0.7972 0.7118 0.6355 0.5674 0.5066 0.4523 0.4039 0.3606 5.3282 70 Cummulative PV 24

А в 51 Requirement 4 52 Net present value when cost 53 54 Year particulars initial investment Annual cash flows 57 9th year Salvage value 58 PV factor @12% 55 0 56 1-9 Amount -449000 85410 44000 Net present value Discounted cash flows =+C55*D55 =+C56*D56 =+C57*D57 =SUM(E55E57) 0.3606 60 Year 61 1 62 2 63 3 64 4 65 5 66 6 67 7 68 8 69 9 70 Cummulative PV 71 72 PV @ 12% =1/1.1241 =1/1.12.2 =1/1.1243 =1/1.1244 =1/1.1245 =1/1.126 =1/1.1247 =1/1.1248 =1/1.129 =SUM(B61:B69)