Question

PA11-1 Calculating Accounting Rate of Return, Payback Period, Net Present Value, Estimating Internal Rate of Return [LO 11-1, 11-2, 11-3, 11-4]

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:  

Initial investment (for two hot air balloons)	$	402,000
Useful life		9	years
Salvage value	$	42,000
Annual net income generated		35,778
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 1 decimal place.)

        

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. 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. (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. Do not round intermediate calculations. Negative amount should be indicated by a minus sign. Round the final answer to nearest whole dollar.)

    

Answer 1

		Investment Value	402000
		Less: Salvage Value	42000
		Net Value	360000
		Useful Life	9
		Depreciation PA	40000
	1
		Annual Income	35778
		Less: Depreciation	-40000
		Net Return	-4222
		Investment Value	402000
		Accounting Rate of Return	-1.1%
	2	Payback Period=Initial Investment/Annual Cash Flow
		Payback Period=402000/35778
		11.24	Years
	3	Year	Cash Flow	CC @10%	Present Value
		0	-402000	1.00	-402000.0
		1	35778	0.91	32525.5
		2	35778	0.83	29568.6
		3	35778	0.75	26880.5
		4	35778	0.68	24436.9
		5	35778	0.62	22215.3
		6	35778	0.56	20195.7
		7	35778	0.51	18359.8
		8	35778	0.47	16690.7
		9	35778	0.42	15173.4
		10	77778	0.39	29986.8
				NPV	-165966.9
	4	Year	Cash Flow	CC @13%	Present Value
		0	-402000	1.00	-402000.0
		1	35778	0.88	31661.9
		2	35778	0.78	28019.4
		3	35778	0.69	24795.9
		4	35778	0.61	21943.3
		5	35778	0.54	19418.9
		6	35778	0.48	17184.8
		7	35778	0.43	15207.8
		8	35778	0.38	13458.2
		9	35778	0.33	11910.0
		10	77778	0.29	22912.5
				NPV	-195487.2