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: (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.)

Initial investment (for two hot air balloons) $ 353,000

Useful life 6 years

Salvage value $ 53,000

Annual net income generated 26,828 BBS’s

cost of capital 9 %

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 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.)

Answer 1

Please find below the solution to the problem:

I have shown the steps & the appropriate formula with the answers

1	Initial investment	$ 353000
	Expected revenue per year	$ 26828
	Time (year)	6
	Total revenue	$ 160968
	Salvage Value	$ 53000
	Depreciation	$ 300000
	Profit	$ -139032	Formula = Total Revenue - Depriciation
	Average annual profit	$ -23172	Profit/years
	Average investment	$ 203000	Formula= (Initial investment+Salvage Value)/2
	ARR Calculation	-11.41%
	Formula	(Expected revenue per year / Initial investment)*100

2		Payback period	13.16
	Formula	Initial investment / Expected revenue per year

3		Initial investment	353000
		Cost of capital	9%
	Year	Expected revenue per year	P.V. of future Cashflows
	1	26828	24613	Formula = Expected revenue per year / (1+Cost of Capital)^year
	2	26828	22581
	3	26828	20716
	4	26828	19006
	5	26828	17436
	6	26828	15997
		Sum of PV	120348
		Net present value	$       (232,652)
		Formula	P.V. of future Cashflows - Initial investment

4		Initial investment	353000
		Cost of Capital	12%
	Year	Expected revenue per year	P.V. of future Cashflows
	1	26828	23954
	2	26828	21387
	3	26828	19096
	4	26828	17050
	5	26828	15223
	6	26828	13592
		Sum of PV	110301
		Net present value	$       (242,699)