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	$	210,000
Useful life	$	10	years
Salvage value		20,000
Annual net income generated	$	4,800
FCA's cost of capital		7	%

Assume straight line depreciation method is used.

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

2. 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.)

3. 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

Initial Investment:				210,000
Useful life				10 yrs
Annual depreciation (210000-20000)10				19000
Annual net income				4800
Annual cash inflow (4800+19000)				23800
Payback period: Initial investment / Annual cash inflows
		210,000 /23800 = 8.82 years
Net present value at 7%
Present value of annual cash inflows of $ 23800					167161.7
($ 23800* Annuity factor at 7% for Year-10 i.e 7.0236)
Present value of salvage value					10166
($20000*PVf of Yyear-10 i.e. 0.5083)
Total Inflows					177327.7
Less: Initial investment					210,000
NPV					-32,672
Net present Value at 3%
Present value of annual cash inflows of $ 23800					203014
($ 23800* Annuity factor at 3% for Year-10 i.e 8.53)
Present value of salvage value					14882
($20000*PVf of Yyear-10 i.e. 0.7441)
Total Inflows					217896
Less: Initial investment					210,000
NPV					7,896