Question

Balloons By Sunset (BBS) s considaing purchasa af two now hot air balloons so that it can cxpand hs desart sunset tours. Varicus information about the proposad Investmant fallows: Inial nwastmant for wa hat ar haloons se Savage value S 45000 Annua ret income $374.000 7 yaars 31.790 generated BBs's cost of 9% apilal Assume sraig line depreciaion method is used Required Help BBS evalate this project by caculaing each of the fol owing: 1. Accouning rate of returm. (Round your answer to 1 decimal place. A0COuntng Rate of Reurn 2. Paytack period. (Round your answer to 2 decimal places.) Рaytack Peried Yars 3. Net present value (NPV). (Euture Vahae of $1. Prese to nearest whole dollar) Vaueof $1. Future Vabe Annuity of $1. Present alue Arily of 31. (Use sppropriate factoris) from the tables provided. Do not round intermediste calculations. Negative amount should be indicated by a minus sign. Round the final answer Net Presant Malue 4. Recaculate the NPV assuming 8BSs coet of captal is 12 percent. (Future alue of 31, Present Valus of 31, Future Valus Annuity of $1. Present Vakue Anviy ef $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 Malue

Answer 1

Solution 1:

Accounting rate of Return
Choose Numerator	/	Choose Denominator	=	Accounting Rate of Return
Annual Net Income	/	Average Investment	=	Accounting Rate of Return
$31,790	/	$3,74,000	=	8.5%

Solution 2:

Computation of Annual net Cash Flows
Annual Net Income	$31,790
Annual Depreciation [($374,000-$45,000)/7]	$47,000
Annual Cash Flows	$78,790

Payback Period
Choose Numerator	/	Choose Denominator	=	Payback Period
Cost of investment	/	Annual net Cash flow	=	Payback Period
$3,74,000	/	$78,790	=	4.75
				Years

Solution 3:

Computation of NPV - Balloons By Sunset
Particulars	Amount
Table or calculator function:	Present Value of $1
Cash Outflows (Beginning of year)	-$3,74,000
n=	0
i=	9%
Present Value	-$3,74,000
Table or calculator function:	Present Value of annuityof $1
Cash Inflow (for next 7 years)	$78,790
n=	7
i=	9%
Table Factor	5.03295
Present Value	$3,96,546
Table or calculator function:	Present Value of $1
Cash Inflow (for 7th year)	$45,000
n=	7
i=	9%
Table Factor	0.54703
Present Value	$24,616
Total Net present value	$47,162

Solution 4:

Computation of NPV - Balloons By Sunset
Particulars	Amount
Table or calculator function:	Present Value of $1
Cash Outflows (Beginning of year)	-$3,74,000
n=	0
i=	12%
Present Value	-$3,74,000
Table or calculator function:	Present Value of annuityof $1
Cash Inflow (for next 7 years)	$78,790
n=	7
i=	12%
Table Factor	4.56376
Present Value	$3,59,579
Table or calculator function:	Present Value of $1
Cash Inflow (for 7th year)	$45,000
n=	7
i=	12%
Table Factor	0.45235
Present Value	$20,356
Total Net present value	$5,934