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.
  

Help BBS evaluate this project by calculating each of the following:

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

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.)

4. Recalculate the NPV assuming BBS's cost of capital is 20 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

year cash flow cumulative cash flow 0 -360000 -360000 1 32760 -327240 2 32760 -294480 3 32760 -261720 4 32760 -228960 5 32760 -196200 6 32760 -163440 7 84760 -78680 average income 40188.57143 1 ARR (40188/360000) 0.111634921 2 payback (o because total inflow is less than outflow) 0 3 NPV (use excel npv function), rate=14% -198733.9927 4 NPV (use excel npv function), rate= 20% -227401.3282

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