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:

Answer 1

Answer 1 Accounting Rate of Return = Annual net income generated / Initial investment = $38,715 / $435,000 = 8.9% 2 Payback period = Investment Required / Annual Net Cash Inflow = $435,000 / $92,715 = 4.69 years ** Depreciation = ($435,000 - $57,000) / 7 yrs = $54,000 Annual Net Cash Inflow = $38,715 + $54,000 = $92,715 3 Calculation of Net Present Value Year Cash Flows PV factor@12% Present Value $92,715 0.89286 $82,782 $92,715 0.79719 $73,911 $92,715 0.71178 $65,993 $92,715 0.63552 $58,922 $92,715 0.56743 $52,609 $92,715 0.50663 $46,972 $92,715 0.45235 $41,940 Salvage $57,000 0.45235 $25,784 Value Present Value of Cash Inflows $448,913 Initial Investment ($435,000) Net Present Value $13,913 mno

Calculation of Net Present Value Year Cash Flows PV factor@15% Present Value $92,715 0.86957 $80,622 $92,715 0.75614 $70,106 $92,715 0.65752 $60,962 $92,715 0.57175 $53,010 $92,715 0.49718 $46,096 $92,715 0.43233 $40,083 $92,715 0.37594 $34,855 Salvage $57,000 0.37594 $21,429 Value Present Value of Cash Inflows $407,163 Initial Investment ($435,000) Net Present Value ($27,837) V VOUWN