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 $1,800,000 10 years $ 140,000 $ 180,000 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 making any calculations, determine whether the IRR is more or less than 15% Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Required 4 < Prex 3.07 Next > e to search O e 9 2 AD00

Answer 1

3)Net Present value

Table or calculator Function	Present value of $ 1
Cash outflow (Beginning of year )	-1,800,000
n	0
i	15%
Present value	-1,800,000
Table or calculator Function	Present value annuity of $ 1
Cash Inflow (for next 10 years)	346000
n	10
i	15%
Table Factor	5.01877
Present value	1,736,494       [346000*5.01877]
Table or calculator Function	present value of $ 1
Cash Inflow (for 10 th year)	140000
n	10
i	15%
Table factor	.24718
Present value	34605         [140000*.24718]
Total net present value [A+B+C]	-1,800,000+ 1,736,494 + 34,605 = -28,901

**Depreciation expense =[cost-salvage value ]/useful life

             = [1800000 - 140000]/10

              = 1660000/10

              = 166000

Annual cash flow =Net Income +Depreciation expense(non cash expense)

               = 180000+166000

                = 346000

D)Since NPV is negative at 15% ,it means IRR will less than 15%