Question

PA11-1 (Algo) Calculating Accounting Rate of Return, Payback Period, Net Present Value, Estimating Internal Rate of Return [LO 11-1, 11-2, 11-3, 11-4]

Balloons By Sunset (BBS) is considering the purchase of two new hot air balloons so that it can expand its desert sunset tours. Various information about the proposed investment follows: (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.)

Initial investment (for two hot air balloons)	$	547,000
Useful life		9	years
Salvage value	$	52,000
Annual net income generated		43,213
BBS’s cost of capital		8	%

Assume straight line depreciation method is used.

Required:
Help BBS evaluate this project by calculating each of the following:

1. Accounting rate of return. (Round your answer to 2 decimal places.)
2. Payback period. (Round your answer to 2 decimal places.)
3. Net present value (NPV). (Do not round intermediate calculations. Negative amount should be indicated by a minus sign. Round the final answer to nearest whole dollar.)
4. Recalculate the NPV assuming BBS's cost of capital is 11 percent. (Do not round intermediate calculations. Negative amount should be indicated by a minus sign. Round the final answer to nearest whole dollar.)

* I have no idea how to calcluate parts 3 and 4. Please help and explain these parts with details!

Answer 1

Solution:

Year	Particulars	Net Cash Flow	Present Value Factor @ 15%	Present Value of Cash Flows
0	Initial Investment	-$420,000	1	-$420,000
1-10	Annual Net Income	$37,800	5.0188	$189,710.64
10	Salvage Value	$50,000	0.2472	$12,360
	Net Present Value			-$217,929.36 rounded to -$217,929