Question

Required information (The following information applies to the questions displayed below.) 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: Initial investment Useful life Salvage value Annual net income generated FCA'S Cost of capital $ 220,000 $ 10 years 25,000 $ 5,000 7% Assume straight line depreciation method is used. 2. Help FCA evaluate this project by calculating each of the following: Payback period. (Round your answer to 2 decimal places.) Payback Period years 3. Help FCA evaluate this project by calculating each of the following: Net present value (NPV). (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $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 Value 4. Help FCA evaluate this project by calculating each of the following: Recalculate FCA's NPV assuming the cost of capital is 3 percent. (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor(s) from the tables provided. Round your final answer to the nearest whole dollar amount.) Net Present Value

Answer 1

Sol Information given Initial Investment Useful Life Solvage Value Annual Net Income Generated FCA's Cost of Capital $ 2,20,000 10year $ 25,000.00 $ 5,000.00 7% Deprecation Straight Line Method = Cost-Salvage Value Nof years of useful Life Deprecation Straight Line Method 220000-25000 10 Deprecation Straight Line Method = $ 19,500 Step 1: Annual Cash Flows $ 5,000 Annual Net Income Generated Add;Deprecation Straight Line Method (Is a non cash expense hence added back) Annual Cash Flows $ 19,500 $ 24,500

1. Computation of Payback Period Payback period 11 Intial Investment Annual Cash Flows 220000 Payback period 24500 Payback period 8.98 2. Computation of NPV Present Value Annual cash flows = Present Value terminal Cash flow = PVAF (r,n) x Annual Cash flows PVF (r,n) X Terminal Cash Flow Cash Flow Annual Cash Flow Salvage Value Select Present value of an Annuity of $1 (See below Note 1) Add; Terminal Salvage Cash Flow (See below Note 2) Total Present Value of Cash Inflow Cash Outflow Amount (A) $ 24,500 $ 25,000.00 PVAF (7%,10)Factor Present Value (B) (A) x (B) 7.0236 $ 1,72,078.20 0.5083 $ 12,707.50 $ 1,84,785.70 $ 2,20,000.00 Net Present Value $ (35,214.30)

Note 1: Annuity Present value of $1 received annual for 10years is calculated using below formula (Can also be taken from annuity tables provided): PVAF (rn) = (1-(1+r)^-n) where ris Discount rate n Period 7% 10years PVAF (7%, 10years) = 1-(1+0.07)^-10) 7% PVAF (7%, 10years) = 7.0236 Note 2: Formula to calculate Present Value Factor (Can also be taken from Present Value tables provided): PVF (rin) = (1+r)^n where ris Discount rate 7% n Period 10years

PVF (7%, 10years) = 1 (1+0.07)-10 PVF (7%, 10years) = 0.5083 Net Present Value is $ $ (35,214) 2. Computation of NPV if FCA's if cost capital is 3% Cash Flow Annual Cash Flow Salvage Value Select Present value of an Annuity of $1 (See below Note 3) Add; Terminal Salvage Cash Flow (See below Note 4) Total Present Value of Cash Inflow Cash Outflow Amount (A) $ 24,500 $ 25,000.00 PVAF (3%,10)Factor Present Value (B) (A) (B) 8.5302 $ 2,08,989.90 0.7441 $ 18,602.50 $ 2,27,592.40 $ 2,20,000.00 Net Present Value $ 7,592.40 Note 3 Annuity Present value of $1 received annual for 10 years is calculated using below formula (Can also be taken from annuity tables

provided): PVAF Factor PVAF (rn) = (1-(1+r)^-n) where ris Discount rate n Period 3% 10years PVAF (3%, 10years) = 1-(1+0.03)^-10) 3% PVAF (3%, 10years) = 8.5302 Note 4: Formula to calculate Present Value Factor (Can also be taken from Present Value tables provided): 1 PVF (rin) = (1+r)^n where ris Discount rate 3% n Period 10years

PVF (3%, 10years) = 1 (1+0.07)-10 PVF (3%, 10years) = 0.7441 Net Present Value is $ $ 7,592.40