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: (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.) BBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBB Initial investment (for two hot air balloons) Useful life Salvage value Annual net income generated BBS's cost of capital $ 386,000 7 years $ 50,000 32,424 10% 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 13 percent. (Do not round intermediate calculations. Negative amount should be indicated by a minus sign. Round the final answer to nearest whole dollar.) IIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIII % years 1. Accounting rate of return 2. Payback period 3. Net present value 4. Net present value assuming 13% cost of capital

Answer 1

1 Accountang rate of return CARRI I ARR = abdual net ancome x 100 Initial investment = $32424 x 100 $ 38 6000 & 8.401 ARR 12 payback period = Initial investment Annualnet cash anflows Annual net cash inflowsi - Net ancome + depreciation. - $32424 t $48000 & $80424 depreciation = $ 386000 - $50.000 - 7 years = $48000 .. payback period = $386000 =4.80 years. 880424

3) Net present value CNPV) present value of cash inflows - Initial anvestment -L$80424 Xprar@ 10% for I yearst $ 50,1000 Xpur at the end of 7th year, (-) D $3860007 = $80424 x 4.8684+ $501000x0.5132 - $386000 & $ 417196020- $386000 $ 3llab T - NPV = $31196 4) Recalculation of the NPV. use the above formula = $80424X DUAR@ 13.1.4 d 50,000 XP VF. at the end of 7th year - $386000 L $80424x 4.4226 + $50,0008 0.4257 - $386ooo = $376938.18 - $386000 = - $9069 . NPV = - $ 9062

Accounting rate of return o payback period 3 Net present values Yalet present vakee assuming 13% cost of capital 8.4 /ol 4.80 years $31196 ng - $9062