Falcon Crest Aces (FCA), Inc., is considering the purchase of a small plane to u
ID: 2531575 • Letter: F
Question
Falcon Crest Aces (FCA), Inc., is considering the purchase of a small plane to use in its wing-walking demonstrations and aerial tour business. Various information about the proposed investment follows:
%
1. Accounting rate of return. (Round your answer to 2 decimal places.)
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. Round the final answer to nearest whole dollar.)
4. Recalculate FCA's NPV assuming the cost of capital is 3% 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. Round your final answer to the nearest whole dollar amount.)
Initial investment $ 160,000 Useful life $ 10 years Salvage value 20,000 Annual net income generated $ 3,800 FCA's cost of capital 10%
Explanation / Answer
1)Accounting rate of return =Net income /average investment
= 3800/160000
= .02375 or 2.375 % [rounded to 2.38%]
2)Payback period:Initial investment /cash flow
= 160000/ 17800
= 8.99 years
**depreciaition =[cost- salvage ]/useful life
=[160000-20000]/10
= 14000
cash flow =net income +depreciation
= 3800+14000
= 17800
3)Present value of cash flow = [PVA10%,10*Annual cash flow ]+[PVF 10%,10*Salvage]
=[6.14457*17800] + [.38554*20000]
= 109373.35+ 7710.8
= 117084.15
NPV = Present value -initial invetment
= 117084.15- 160000
= - 42915.85 [rounded to -42916]
4)Present value = [PVA3%,10*Annual cash flow ]+[PVF 3%,10*Salvage]
=[8.53020*17800]+ [.74409*20000]
= 151837.56+ 14881.8
= 166719.36
NPV = 166719.36-160000
= 6719.36 [rounded to 6719]
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