Question

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: $ Initial investment (for two hot air balloons) Useful life Salvage value Annual net income generated BBS's cost of capital 357,000 8 years 53,000 26,775 $ 11% Assume straight line depreciation method is used.

Answer 1

Solution 1:

Accounting rate of Return
Choose Numerator	/	Choose Denominator	=	Accounting Rate of Return
Annual Net Income	/	Average Investment	=	Accounting Rate of Return
$26,775	/	$3,57,000	=	7.5%

Solution 2:

Computation of Annual net Cash Flows
Annual Net Income	$26,775
Annual Depreciation [($357,000-$53,000)/8]	$38,000
Annual Cash Flows	$64,775

Payback Period
Choose Numerator	/	Choose Denominator	=	Payback Period
Cost of investment	/	Annual net Cash flow	=	Payback Period
$3,57,000	/	$64,775	=	5.51
				Years

Solution 3:

Computation of NPV - Balloons By Sunset
Particulars	Amount
Table or calculator function:	Present Value of $1
Cash Outflows (Beginning of year)	-$3,57,000
n=	0
i=	11%
Present Value	-$3,57,000
Table or calculator function:	Present Value of annuityof $1
Cash Inflow (for next 8 years)	$64,775
n=	8
i=	11%
Table Factor	5.14612
Present Value	$3,33,340
Table or calculator function:	Present Value of $1
Cash Inflow (for 8th year)	$53,000
n=	8
i=	11%
Table Factor	0.43393
Present Value	$22,998
Total Net present value	-$662

Solution 4:

Computation of NPV - Balloons By Sunset
Particulars	Amount
Table or calculator function:	Present Value of $1
Cash Outflows (Beginning of year)	-$3,57,000
n=	0
i=	14%
Present Value	-$3,57,000
Table or calculator function:	Present Value of annuityof $1
Cash Inflow (for next 8 years)	$64,775
n=	8
i=	14%
Table Factor	4.63886
Present Value	$3,00,482
Table or calculator function:	Present Value of $1
Cash Inflow (for 8th year)	$53,000
n=	8
i=	14%
Table Factor	0.35056
Present Value	$18,580
Total Net present value	-$37,938