Q: Balloons By Sunset (BBS) is considering the purchase of two new hot air ballo
ID: 2473056 • Letter: Q
Question
Q:
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.
Help BBS evaluate this project by calculating each of the following:
(Number 2 and 4's answers were already found and are listed below)
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)
Annual depreciation = (Initial Investment - Scrap Value) / Useful Life = (364,000 - 49,000) / 7 = $45,000
Average annual Income = Annual Net Income - Depreciation = $33,124 - $45,000 = - $11,876
Accounting Rate of Return = - $11,876 / 364,000 = - 3.26%
2)
Payback Period =
Initial Investment / Annual Cash Flow = 364,000 / 33,124 = 10.99 Years.
3)
4)
Calculations Years 0 1 2 3 4 5 6 7 A Initial Cash Flow -364000 B Annual Cash Flow 33124 33124 33124 33124 33124 33124 33124 C Terminal Cash Flow 49000 D = A+B+C Net Cash Flow -364000 33124 33124 33124 33124 33124 33124 82124 E PV Factor @14% 1.0000 0.8772 0.7695 0.6750 0.5921 0.5194 0.4556 0.3996 F = D x E Present Value -364000 29056.14 25487.84 22357.76 19612.07 17203.57 15090.85 32819.82 G = Sum F Net Present Value -202372Related Questions
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