Calculating Accounting Rate of Return, Payback Period, Net Present Value
Hot Air Highlights (HAH) 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) | $500,000 |
Useful life | 10 years |
Salvage value | $ 50,000 |
Annual net income generated | $ 42,000 |
HAH’s cost of capital | 11% |
Required:
Help HAH evaluate this project by calculating each of the following:
1.Accounting rate of return.
2.Payback period.
3.Net present value (NPV).
4.Recalculate the NPV assuming HAH’s cost of capital is 15 percent.
5.Based on your calculation of NPV, what would you estimate the project’s internal rate of return to be?
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