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: $ 282,000 6 years Initial investment (for two hot air balloons) Useful life Salvage value Annual net income generated BBS's cost of capital $ 48,000 21,714 11% Assume straight line depreciation method is used Required: Help BBS evaluate this project by calculating each of the following: 1. Accounting rate of return. (Round your answer to 1 decimal place.) Accounting Rate of Return 2. Payback period. (Round your answer to 2 decimal places.) Payback Period Years 3. Net present value (NPV). (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor(s) from the tables provided. Do not round intermediate calculations. Negative amount should be indicated by a minus sign. Round the final answer to nearest whole dollar.) Net Present Value

Answer 1

:) computation of accounting rate of vetern CARR). ARR = x 100 Annual net income Initial anvestment $ 21714 X $ 2.82000 - 77% in Accounting rate of return = 7.7% 18) Computation of payback period payback period - Initial investusent Dol Anneal het cash inflows Annual net cash Anflows i Annual net ancouse & depreciation depreciation = $282000-$48000 6 years = $ 39000

-Ansual het cash anflows = 6. 21714 +$39ooo $ 60714 payback period = $282000 $ 60714 = 4.64 years! - 3 computation of NPV. NPV = [present value of cashian flows] [Initial investment I = $60714 x PVAR @ Ut for 6 years It $48000Xpwr at the end of 6th. year – $282000 - $60714 X 4.2305 + $48000 80.5346 - $282000] $ $ 282511 - $282000 = $54 . NPV = $511

4) Recomputation of NPV to we can we the above formula = ($60714x PVAR@ 14.1. for 6 yearst $ 48000x Puf at the end of 6th year $282000] cho 60 71483.8887 + $48000x 0.4556 - $ 282000] V # $25196733 - $.282.000 = - $ 24033 di Hpv - $24033