Question

Hello, I am struggling to understand some of my accounting homework.

Question 01 )

Tulsa Company is considering investing in new bottling equipment and has two options: Option A has a lower initial cost but would require a significant expenditure to rebuild the machine after four years; Option B has higher maintenance costs, but also has a higher salvage value at the end of its useful life. Tulsa’s cost of capital is 11 percent. The following estimates of the cash flows were developed by Tulsa’s controller:   

	Option A			Option B
Initial investment	$	320,000		$	454,000
Annual cash inflows		150,000			160,000
Annual cash outflows		70,000			75,000
Costs to rebuild		120,000			0
Salvage value		0			24,000
Estimated useful life		8	years		8	years

Required:
Calculate 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 amounts should be indicated by a minus sign. Round your "Present Values" to the nearest whole dollar amount.)

Question 02)

Question 03)

Linda’s Luxury Travel (LLT) is considering the purchase of two Hummer limousines. Various information about the proposed investment follows:   

Initial investment (2 limos)	$	1,320,000
Useful life		10	years
Salvage value	$	130,000
Annual net income generated		121,440
LLT’s cost of capital		15	%

Assume straight line depreciation method is used.     

Required:
Help LLT evaluate this project by calculating each of the following:    

1. Accounting rate of return. (Round your percentage answer to 1 decimal place.)



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



3. Net present value. (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. Cash Outflows and negative amounts should be indicated by a minus sign. Round your "Present Values" to the nearest whole dollar amount.)

Answer 1

Question 1

Annual Net Cash Inflow Option A = $150000 – 70000 = $80000

Annual Net Cash Inflow Option B = $160000 – 750000 = $85000

Net Present Value = Present Value of Net Cash Inflow + Present Value of salvage value – Present Value of Cost to rebuild – Initial Investment

Option A = $12,642

= $80000 x (PVAF 11%,8Years) - $120000 x (PVF 11%, 4 Years) - $320000

= [ $80000 x 5.14612 ] - [ $120000 x 0.65873 ] - $320000

= $12,642

Option B = - $6,165 (Negative)

= $85000 x (PVAF 11%,8Years) + $21000 x (PVF 11%, 8 Years) - $454000

= [$85000 x 5.14612 ] + [ $21000 x 0.43393] - $454000

= - $6,165 (Negative)

Question 2

1. Accounting rate of return = 9.2%

Depreciation = ($1320000 – 130000) /10 = $119000

Cash Flow = Net Income + Depreciation

                   = $121440 + 119000 = 240440

Accounting Rate of return = (Net Income / Initial Investments) * 100

= ($121440 / 1320000) x 100 = 9.2%

2. Payback period = 5.49 Years

= Initial Investment / cash flow

= $1320000 / 240440 = 5.49 Years

3. Net present value (NPV) at 15% = - $81,154 (Negative)

= [ $240440 x (PVAF 15%,10 Years) + $130000 x (PVF 15%,10 Years) ] - $1320000

= [ ($240440 x 5.01877 ) + ($130000 x 0.24718) ] - $1320000

= - $81,154 (Negative)