Question

3 300 polnts PA11-1 Calculating Accounting Rate of Return, Payback Period, Net Present Velue, Estimating Internal Rate of Return [LO 11-1, 11-2,11-3 4] Balloons By Sunset (BBS) is considering the purchase of two new hot air belloons so thet it cen expand its desert sunset tours. Various information about the propose investment follows: Initial investment ffor two hot air balloons) Useful Ife Salrage value Annual net income generated BBSs cost of capital 507.000 10 years $ 47,000 40.551 8% Assume straight line depreciation method is used Required Help BB5 evaluate this project by calculating each of the following 1. Accounting rate of return. (Round your answer to 1 decimal place.) 2. Payback period. (Round your answer to 2 decimal places.) Years 3. Net present value (NP) (Future Value of $1 tables provided. Do not round intermediate calculations. Negative amount should be indicated by a minus sign. Round the final answer to nearest whole dollar.) . Present Value of S1. Future Value Annuity of S1. Present Volue Annsity of S1.) (Use appropriate factor(s) from the 4. Recalculate the NPV assuming 885's cost of capital is 11 percent. Euture Valun of $1 Present Value of $1, Future Volue Annsity of S1, Present Value Annulity of the final answer to nearest whole dollar)

Answer 1

(1)-Accounting rate of return

Accounting Rate of return = (Net Income / Initial Investments) x 100

= ($49,551 / $597,000) x 100

= 8.30%

(2)-Payback Period

Straight Line Depreciation Expense = [Initial Investment – Salvage Value] / Useful Life

= [$597,000 - $47,000] / 10 Years

= $550,000 / 10 Years

= $55,000 per year

Annual Cash Flow = Net Income + Depreciation Expenses

= $49,551 + $55,000

= $104,551 per year

Therefore, the Payback Period = Initial Investment / Annual Cash Inflow

= $597,000 / 104,551 per year

= 5.71 Years

(3)-Net present value (NPV) if the cost of capital is 8%

Net present value = Present Value of annual cash inflows + Present Value of Salvage Value – Initial Investment

= $104,551(PVIAF 8%,10 Years) + $47,000(PVIF 8%,10 Years) - $597,000

= ($104,551 x 6.7101) + ($47,000 x 0.4632) - $597,000

= $21,770 + $701,548 - $597,000

= $126,318

(4)-Net present value (NPV) if the cost of capital is 11%

Net present value = Present Value of annual cash inflows + Present Value of Salvage Value – Initial Investment

= $104,551(PVIAF 11%,10 Years) + $47,000(PVIF 11%,10 Years) - $597,000

= ($104,551 x 5.8892) + ($47,000 x 0.3522) - $597,000

= $16,553 + $615,722 - $597,000

= $35,275

NOTE

-The formula for calculating the Present Value Annuity Inflow Factor (PVIFA) is [{1 - (1 / (1 + r)ⁿ} / r], where “r” is the Discount Rate/Cost of capital and “n” is the number of years.

-The formula for calculating the Present Value Inflow Factor (PVIF) is [1 / (1 + r)ⁿ], where “r” is the Discount Rate/Cost of capital and “n” is the number of years.