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:

  

Assume straight line depreciation method is used.
  

  

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

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

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.)

4. Recalculate the NPV assuming BBS's cost of capital is 15 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. Negative amount should be indicated by a minus sign.)

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:

Explanation / Answer

1. Accounting rate of return.

Annual Depreciation = ($364,000 - $49,000) / 7 = $45,000

Average Accoting Income = $33,124 - $45,000 = -$11,876

Accounting rate of return = Average Accouting Income / Initial Investment = -$11,876 / $364,000 = -7.2%

2. Payback Period

Payback Period = Initial Invetment / Annual Payback = $364,000 / $33,124 = 10.989 Years

3. Net present value (NPV). (Future Value of $1, Present Value of $1, Future Value Annuity of $1,Present Value Annuity of $1.)

4. Recalculate the NPV assuming BBS's cost of capital is 15 percent. (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.)

Years Cashflow PVF @ 14% PV of Cashflow 1 $33,124.00 0.8772 $29,056.37 2 $33,124.00 0.7695 $25,488.92 3 $33,124.00 0.675 $22,358.70 4 $33,124.00 0.5921 $19,612.72 5 $33,124.00 0.5194 $17,204.61 6 $33,124.00 0.4556 $15,091.29 7 $33,124.00 0.3996 $13,236.35 Total $1,42,048.96 Add: Salvage Value $49,000.00 Less: Initial Investment $3,64,000.00 NPV -$1,72,951.04

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