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	$	140,000
Useful life	$	10	years
Salvage value		10,000
Annual net income generated	$	3,400
FCA's cost of capital		6	%

Assume straight line depreciation method is used.

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.)

    

Answer 1

Answer to Part 1.

Accounting Rate of Return = Annual Operating Income / Average Investment * 100
Average Investment = (140,000 + 10,000) / 2
Average Investment = $75,000

Accounting Rate of Return = 3,400 / 75,000 * 100
Accounting Rate of Return = 4.53%

Answer to Part 2.

Payback period = Initial Investment / Annual Operating Cash Flow
Annual Operating Cash Flow = Annual Net Income + Depreciation

Depreciation = (Cost – Salvage Value) / Useful Life
Depreciation = (140,000 – 10,000) / 10
Depreciation = $13,000

Annual Operating Cash Flow = $3,400 + $13,000
Annual Operating Cash Flow = $16,400

Payback period = 140,000 / 16,400
Payback period = 8.54 years