Question

Falcon Crest Aces (FCA), Inc., is considering the purchase of a small plane to use in its wing-walking demonstrations and aerial tour business. Various information about the proposed investment follows:     

Initial investment	$	200,000
Useful life	$	10	years
Salvage value		20,000
Annual net income generated	$	4,600
FCA's cost of capital		9	%

Required:
Help FCA 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). (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. Negative amount should be indicated by a minus sign. Round the final answer to nearest whole dollar.)

4. Recalculate FCA's NPV assuming the cost of capital is 3% 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. Round your final answer to the nearest whole dollar amount.)

5.	Without doing any calculations, what is the project's IRR?

Greater than 9%

Less than 3%

Between 3% and 9%

Answer 1

Answer:-1)-Accounting rate of return =(Average accounting income/Total Investment)*100

=($4600/$200000)*100

=2.3%

2)-Pay back period =Total investment/Total cash flow

=$200000/($4600+$20000)

=8.13 years

Total cash flow =Net income + Annual depreciation

Annual depreciation =(Initial investments-Salvage value)/useful life

=($200000-$20000)/9 =$20000

3)- Net present value = Present value of cash inflows – Total outflows

     ={($24600*6.418)+($4600*0.422) - $200000}

     =($157883+$1941) - $200000

     = $159824-$200000

     = ($40176)

4)- Net present value = Present value of cash inflows – Total outflows

     ={($24600*8.530)+($4600*0.744) - $200000}

     =($209838+$3422) - $200000

     = $213260-$200000

     = 13260

5)-The project IRR is between 3% and 9%.