Question

Falcon Crest Aces (FCA), Inc., is considering the purchase of a small plane to use in its wing-walking demonstrations and aerial tour business. Various information about the proposed investment follows: $ 310,000 10 years Initial investment Useful life Salvage value Annual net income generated FCA's cost of capital 25,000 6,800 7% Assume straight line depreciation method is used.

Answer 1

Answer-1)- Accounting rate of return =2.19%.

Explanation= Accounting rate of return= (Annual net income/ Initial investment)*100

= ($6800/($310000)*100

= 2.19%

2)- Payback period = 8.78 years.

Explanation- Payback period is the time in which the initial cash outflow of an investment is expected to be recovered from the cash inflows generated by the investment. It is one of the simplest investment appraisal techniques.

In case when cash inflow are even, the formula to calculate payback period is:

Payback period =Initial investment / Cash Inflow per period

= $310000/$35300

= 8.78 years

Where- Annual cash inflow = Net income+ Annual depreciation

= $6800+$28500

= $35300

Explanation- Straight line Method- Depreciation Expense Annual

= Cost of asset- Salvage value of asset/No. of useful life (years)

=($310000-$25000)/10 years

=$285000/10 years

= $28500

3)- Net present value = -$49353.

Explanation-Net present value = Present value of cash inflows – Total outflows

= ($35300*7.024)+($25000*0.508)-$310000

= $247947 + $12700 - $310000

= $260647-$310000

= -$49353

4)- Net present value = $9709.

Explanation-Net present value = Present value of cash inflows – Total outflows

= ($35300*8.530)+($25000*0.744)-$310000

= $301109 + $18600 - $310000

= $319709-$310000

= $9709