Question

Linda's Luxury Travel (LLT) is considering the purchase of two Hummer limousines. Various information about the proposed investment follows: Initial investment (2 limos) Useful life Salvage value Annual net income generated LLT's cost of capital $1,500,000 10 years $ 140,000 142,500 14% Assume straight line depreciation method is used. Required: Help LLT evaluate this project by calculating each of the following: 1. Accounting rate of return. (Round your percentage answer to 1 decimal place.) Accounting Rate of Return % 2. Payback period. (Round your answer to 2 decimal places.) Payback Period 1 Years

Answer 1

computation of accounting rate of retum cARRIS ARR - Net Income xloo Initial investment $142500 $ 15,00,000 x 100 Accounting rate of return = 9.5%. o competation of payback period Initial investment Annual net cash inflows payback period = Annual net cast inflows dont Net ancome t depreciation (non cash) Depreciation = $1500 000 - $ 140 000 v 10 years $136000

Annual net cash inflows $ 142500 + $.13600D $ 278 500 5.39 years. payback period = $ 150oooo $ 278500 3) Computation of NPV NPV = [present varee of cast inflows.) Langtial muestusent) cash outflow Beginning) $1500000 n 110 years 14 al present vale at year " Beginning cash anflow $ 1500 ooo $ 278500 years 5.161 $1452683.85 $ 140000 0. 2697 PVAR b present value of cash salvage value PVF c) present value of Salvage d) Total present value (btc) 2 NPV (d-a) $37758 $ 1490441.85 - $9558

. Net prebent value = - $9558 4) IRR less than 14°).