Question

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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	$	260,000
Useful life	$	10	years
Salvage value		25,000
Annual net income generated	$	5,800
FCA's cost of capital		7	%

Assume straight line depreciation method is used.

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. Negative amount should be indicated by a minus sign. Round the final answer to nearest whole dollar.)

4. 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

3.Net present value (NPV) at 7% = - $41,501 (Negative)

Annual Cash flow = Net Income + Depreciation

                             = $5,800 + [($2,60,000 - $25,000)/10]

                             = $5,800 + $23,500

                             = $29,300

Net present value (NPV) = Present Vale of cash flows – Estimated costs

= [ $29,300 x (PVAF 7%,10Years) ] + ($25000 x (PVF 7%,10 Years )) -$2,60,000

= [ $29,300 x 7.0236] – [ $25000 x 0.5083] - $2,60,000

= $2,05,791.50 + $12,707.50 - $2,60,000

= - $41,501 (Negative)

4.Net present value (NPV) at 3% = - = $8,435 (Positive)

Annual Cash flow = Net Income + Depreciation

                             = $5,800 + [($2,60,000 - $25,000)/10]

                             = $5,800 + $23,500

                             = $29,300

Net present value (NPV) = Present Vale of cash flows – Estimated costs

= [ $29,300 x (PVAF 3%,10Years) ] + ($25000 x (PVF 3%,10 Years )) -$2,60,000

= [ $29,300 x 8.5302] – [ $25000 x 0.744] - $2,60,000

= $2,49,935 - $18,600 - $2,60,000

= $8,435 (Positive)