In: Accounting

# [The following information applies to the questions displayed below.] Falcon Crest Aces (FCA), Inc., is considering...

[The following information applies to the questions displayed below.]

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.) ## Solutions ##### Expert Solution 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