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	$	190,000
Useful life	$	10	years
Salvage value		20,000
Annual net income generated	$	4,400
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.)

1a. Payback period. (Round your answer to 2 decimal places.). ???? years

1b. 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.)

1c. 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

1. Accounting Rate of Return = Average Net Income Average Investment

= 4,400 190,000

Accounting Rate of Return = 2.32%

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1.a Payback Period = A + [B C]

Where,

A is the last period with a negative cumulative cash flow;
B is the absolute value of cumulative cash flow at the end of the period A;
C is the total cash flow during the period after A

Depreciation = (Initial cost - salvage value) Useful life of asset = (190,000 - 20,000) 10 = 17,000

Net Cash flow = Annual Net income + Depreciation = 4,400 + 17,000 = 21,400  

Payback Period = 8 + (18,800 21,400) = 8.88 years

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1.b

NPV can be calculated by using NPV function in excel.

NPV is -$32,494.14

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1.c

NPV is -$7453.66