Question

Linda's Luxury Travel (LLT) is considering the purchase of two Hummer limousines. Various information about the proposed investment is as follows

Initial investment (2 limos) $960,000

Useful life 10 years

Salvage value $120,000

Annual net income generated $82,560

LLT's cost of capital 13%

Assume straight line depreciation method is used. Required Help LLT evaluate this project by calculating each of the following:

1. Accounting rate of return. (Round your percentage answer to 1 decimal place.)

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

3.Net present value.

I require answer for all the 3 questions. Thank you

Answer 1

Solution 1:

Average Investment = ($960,000 + $120,000) / 2 = $540,000
Accounting rate of Return
Choose Numerator	/	Choose Denominator	=	Accounting Rate of Return
Annual Net Income	/	Average Investment	=	Accounting Rate of Return
$82,560	/	$5,40,000	=	15.29%

Solution 2:

Computation of Annual net Cash Flows
Annual Net Income	$82,560
Annual Depreciation [($960,000-$120,000)/10]	$84,000
Annual Cash Flows	$1,66,560

Payback Period
Choose Numerator	/	Choose Denominator	=	Payback Period
Cost of investment	/	Annual net Cash flow	=	Payback Period
$9,60,000	/	$1,66,560	=	5.76
				Years

Solution 3:

Computation of NPV - Linda's Luxury Travel
Particulars	Amount
Table or calculator function:	Present Value of $1
Cash Outflows (Beginning of year)	-$9,60,000
n=	0
i=	13%
Present Value	-$9,60,000
Table or calculator function:	Present Value of annuityof $1
Cash Inflow (for next 10 years)	$1,66,560
n=	10
i=	13%
Table Factor	5.42624
Present Value	$9,03,795
Table or calculator function:	Present Value of $1
Cash Inflow (for 10th year)	$1,20,000
n=	10
i=	13%
Table Factor	0.29459
Present Value	$35,351
Total Net present value	-$20,855