Question

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)	$	449,000
Useful life		8	years
Salvage value	$	57,000
Annual net income generated		39,512
BBS’s cost of capital		12	%

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 15 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

Req 1:
Annual Net Income generated:				39512
Divide: Average Investment				253000
(449000+57000)/2
Accounting Rate of return				15.62%
Req 2:
Annual Net income:				39512
Add: Depreciation (449000-57000)/8				49000
Annual Inflows				88512
Initial Investment				449000
Divide: Annual Inflows				88512
Payback period				5.07
Req 3:
NPV at 12%:
Annual Inflows				88512
Annuity present value factor at 12% for 8yrs				4.9676
Present value of inflows				439692.2
Present value of Salvage				23022.3
(57000*0.4039)
Present value of total inflows				462714.5
Less: Initial Investment				449000
Net present value				13714.51
Req 4:
NPV at 15%
Annual Inflows				88512
Annuity present value factor at 15% for 8yrs				4.4873
Present value of inflows				397179.9
Present value of Salvage				18633.3
(57000*0.3269)
Present value of total inflows				415813.2
Less: Initial Investment				449000
Net present value				-33186.8