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	$	160,000
Useful life	$	10	years
Salvage value		20,000
Annual net income generated	$	3,800
FCA's cost of capital		10	%

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). (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

1)Accounting rate of return =Net income /average investment

             = 3800/160000

             = .02375 or 2.375 % [rounded to 2.38%]

2)Payback period:Initial investment /cash flow

        = 160000/ 17800

        = 8.99 years

**depreciaition =[cost- salvage ]/useful life

    =[160000-20000]/10

   = 14000

cash flow =net income +depreciation

        = 3800+14000

         = 17800

3)Present value of cash flow = [PVA10%,10*Annual cash flow ]+[PVF 10%,10*Salvage]

                 =[6.14457*17800] + [.38554*20000]

                = 109373.35+ 7710.8

                 = 117084.15

NPV = Present value -initial invetment

    = 117084.15- 160000

      = - 42915.85   [rounded to -42916]

4)Present value = [PVA3%,10*Annual cash flow ]+[PVF 3%,10*Salvage]

      =[8.53020*17800]+ [.74409*20000]

        = 151837.56+ 14881.8

       = 166719.36

NPV = 166719.36-160000

         = 6719.36 [rounded to 6719]