Balloons By Sunset (8BS) is considering the purchase of two new hot air balloons

Question

Balloons By Sunset (8BS) 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 Required: Help BBS evaluate this project by calculating each of the following: 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 S1, Present value of S1, Future Value of Annuity S1, Present value of Annuity S1) (Use appropriate factor(s) from the tables provided. Negative amount should be indicated by a minus sign.) Recalculate the NPV assuming BBS's cost of capital is 20 percent (Future Value of Si. Present Value of SI. Future Value Annuity of S1. Present Value Annuity of Si.) (Use appropriate factor(s) from the tables provided. Negative amount should be indicated by a minus sign.)

Explanation / Answer

We have been provided with the information as follow

Now we will calculate Accounting rate of return as follow

ARR= Annual Income / investment

=46906/499000

=9.4%

(2)

Now we will calculate Payback period as follow

We require 249500 and it is acquired between year 5 to 6

The days will be calculated as follow

=249500-234530

=14970

In the sixth year it generate income of 46906 during the year so $14970 will genrate in the days

=14970*365/46906

=116.49

=116 days

So payback period is 5 year and 116 days

(3)

(4) NPV if cost of Capital is 20%

Initial investment
(for two hot air balloons) 499000 Useful life 9 Salvage value 49000 Annual net income generated 46906 BBS’s cost of capital 14%

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