Question

Need help with #1 and #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:  

Initial investment (for two hot air balloons)	$	488,000
Useful life		9	years
Salvage value	$	56,000
Annual net income generated		39,040
BBS’s cost of capital		11	%

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 1 decimal place.)

        

2. Payback period. (Round your answer to 2 decimal places.)

         

3. 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.)

         

4. Recalculate the NPV assuming BBS's cost of capital is 14 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. Do not round intermediate calculations. Negative amount should be indicated by a minus sign. Round the final answer to nearest whole dollar.)

    

Answer 1

1) ARR Average Investment = $488000+56000/2 =272000 Accounting Rate Of Reutn = Average Net Profit/ Average Investment =39040/272000 14.4%

Payback Period Annual Depreciation = $488000-56000/9 years =$48000 Annual Cash Flow= Annual net income + Depreciation =$39040+48000 =$87040 Payback period = Initinal investment/ annual cash flow =$488000/87040 =5.61 Years

co Calculation of Net Present Value 11% OOOOO - bO Annual Cash Flow PVA Factor 11%, For 9 years PV Of Annual Cash Flow (a*b) Salvage Value PV Factor 11%, For 9 year PV of Salvage Value (d*e) 87040 5.53705 481944.62 56000 0.39092 21891.7872 Initial Cost Of Project NPV (c+f-d) 488000 15836

Calculation Of Net Present Value 14% OO Annual Cash Flow PVA Factor 14%, For 9 years PV Of Annual Cash Flow (a*b) Salvage Value PV Factor 14% , For 9 year PV of Salvage Value (d*e) Initial Cost Of Project NPV (c+f-d) 87040 4.94637 430532.20 56000 0.30751 17220.4448 488000 -40247 JO + D Feel Free To Discuss Queries. Please Rate