Question

Linda's Luxury Travel (LLT) is considering the purchase of two Hummer imousines. Various information about the proposed Investment follows: Initial investment $1,140,000 10 years (2 limos) Useful life Salvage value $ 130,000 Anaal net income 101,460 generated LLT's cost of capital Assume straight line depreciation method is used. Required: Help LLT evaluate this project by calculating each of the following: 1. Accounting rate of return 2. Payback period. 3. Net present value 4. Without ang any calculations, determine whether the IRR is more or less than 143 comprese this question by entering your answers in the tabs Deow. Required Required Required Required Calculate net present value. (Future Value of 51. Present Value of 51, Future Value Annuity of $1. Present Value Annuity of $1.) (Use appropriate factors) from the tables provided. Cash Outflows and negative amounts should be indicated by a minus sign Round your "Present Values to the nearest whole dollar amount) Show less Table or calculator Function Cash Outdow (Beginning of s Present Value of $1 3 5.083 jhe Year Present Value $ O XXX 1.001333 Present Table or Calo ator Funcha Cashindow for Next 10 Table Factor Preset Value

Answer 1

1)Accounting rate of return = annual net income/average investment
average investment = 1140000+130000/2 = 635000
accounting rate of return = 101460/635000 = 15.98%
2) payback period = cost of investment/annual net cash flow
annual net cash flow = annual net income+depreciation
depreciation = (1140000-130000)/10 = 101000
annual net cash flow = 101460+101000 = 202460
payback period = 1140000/202460 = 5.63 years
3) net present value
Table or calculator function				present value of $1
cash outflow (beginning of year)				-1140000
n =				10
i=				14%
present value				-1140000
Table or calculator function				present value of annuity $1
cash inflow (nor next 10 years)				202460
n =				10
i=				14%
Table factor				5.2161
present value				1056051.61
Table or calculator function
cash inflow (for 10years)				130000
n =				10
i=				14%
Table factor				0.2697
present value				35061
Total net present value				-48887.394