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: (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)	$	345,000
Useful life		7	years
Salvage value	$	44,000
Annual net income generated		30,705
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.)

Answer 1

We are assuming that salvage value and Annual net Income are given for one balloon

QUESTION 1-

Accounting Rate of Return =   

Accounting Rate of Return =   

Accounting Rate of Return = 17.80%

QUESTION 2-

Payback period =

Payback period =

Payback period = 5.62 years

QUESTION3-

Net Present Value = Present Value of Cash Inflow - Present Value of cash outflow

Net Present Value = [Annual cash inflow * PVAF (10%, 7 years)] + [salvage value * PVF(10%,7years)] - Initial Investment

Net present Value = [($30,705 * 2) * 4.8684] + [ ($44,000 * 2 ) * 0.513 ] - $345,000

Net Present Value = $298,968.44 + $45,144 - $345,000

Net Present Value = -$887.56 or (-)$888

QUESTION 4-

Net Present Value = Present Value of Cash Inflow - Present Value of cash outflow

Net Present Value = [Annual cash inflow * PVAF (13%, 7 years)] + [salvage value * PVF(13%,7years)] - Initial Investment

Net present Value = [($30,705 * 2) * 4.4226 ] + [ ($44,000 * 2 ) * 0.425] - $345,000

Net Present Value = $271,591.866 + $37,400- $345,000

Net Present Value = -$36,008.13 or (-) $36,008

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