In: Accounting
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.)
Initial investment (for two hot air balloons) | $ | 303,000 | |||||
Useful life | 7 | years | |||||
Salvage value | $ | 51,000 | |||||
Annual net income generated | 25,149 | ||||||
BBS’s cost of capital | 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.)
Annual depreciation = (303000-51000)/7 = $36,000
annual cash inflow = Net income + depreciation
= $25149+36000 = $61,149
1. Accounting rate of return = average profit / average investment
= $61149/((303000+51000)/2) = 34.55%
2. Payback period = initial investment / annual cash inflow
= $303,000/61149 = 4.96 years
3. Present value of annual cash flows
(61149*4.868+51000*0.513) $323,826.33
Less: Amount to be invested
-303000
Net present
value $20,826
4. Present value of annual cash flows
(61149*4.423+51000*0.425) $292,137.03
Less: Amount to be invested
-303000
Net present
value $-10,863