Balloons By Sunset (BBS) is considering the purchase of two new hot air balloons

Question

Balloons By Sunset (BBS) is considering the purchase of two new hot air balloons so that it can expand its desert sunset tours. Various information about the proposed investment follows Initial investment (for two hot air balloons) 415,000 Useful life Salvage value Annual net income generated BBS's cost of capital 7 years 51,000 38,180 8% Assume straight line depreciation method is used Required Help BBS evaluate this project by calculating each of the following 1. Accounting rate of return. (Round your answer to 1 decimal place.) Accounting Rate of Return 2. Payback period. (Round your answer to 2 decimal places.) Payback Period Years 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. Do not round intermediate calculations. Negative amount should be indicated by a minus sign. Round the final answer to nearest whole dollar.) Net Present Value 4. Recalculate the NPV assuming BBS's cost of capital is 11 percent. (Future Value of $1. Present Value of $1, Future Value Annuity of $1, Present Value Annuity of S1.) (Use appropriate factor(s) from the tables provided. Do not round intermediate calculations. Negative amount should be indicated by a minus sign Round the final answer to nearest whole dollar.) Net Present Value

Explanation / Answer

1

ARR=Net Income/Average amount Invested

Average amount Invested=(Amount Invested +Resdual Value)/2

=(415000+51000)/2=275000

ARR=38180/275000=13.88%

2

Payback Perod

Deprciation =(415000-51000)/7=52000

Annual Cash flow =52000+38180=90180

Payback Period =Intial Investment/Annual Cash Floe =415000/90180=4.60 Years

3

4

PV factor 8% Initial Investment -415000 1.0000 -415,000 Cash Flow 90180 5.2064 469,510 Salvage value 51000 0.5835 29,758 Net Present Value 84,268

Related Questions

Navigate

• Browse (All)
• Browse B
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.