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:  

Initial investment (for two hot air balloons) $ 570,000 Useful life 10 years Salvage value $ 50,000 Annual net income generated 51,300 BBS’s cost of capital 7 % Required: Help Bevaluate this project by cakulating each of the folosing 1. Accounting rate of retun. (Round your answer to 1 decimal place. 2. Paytea:k p Round your answer to 2 decimal places.) 3. Nel les ril va u NPV Futute a t t ?1 Piesent Round the final answer to nearest whole dollar.) e o$1 $1. FulVue Annuit uily cl $1. Piesent Vale Annuily $1(use appropriate fac lculations. Negative amount should be due D S Fullt Valuet nriuit c 31. Pre ent elue Anriuil D(S1 use appropriate tactor s from the ables provided. Do not round ntermediate calculations. Negative 3mount should be indicated b a minus sign. 4. Rescakaulate the NP assug HHS's crst at caral ts1D percent ue alu at S1, Present Value cit $1, Fu should be indicated by a minus sign. Round the final answer to nearest whole dollar. VaAuty of $1, Hresent Va Anmaty ot $1(Use appropriato factoris) trom the t tablas provided. Do not round intermediate calculations. Nagative amount

Explanation / Answer

1. Accounting rate of return = 9%

Accounting Rate of return = (Net Income / Initial Investments) * 100

Depreciation = ($570000 – 50000) / 10 = $52000

Cash Flow = Net Income + Depreciation

                   = $51300 + $52000

                   = $103300

Accounting Rate of return       = ($51300 / 570000) * 100 = 9 %

2. Payback period = 5.52 Years

= Initial Investment / cash flow

= $570000 / $103300

= 5.52 Years

3. Net present value (NPV) at 7% = $1,80,953

= [ $103300 x (PVAF 7%,10 Years) + $50000 x (PVF 7%,10 Years) ] - $570000

= [ ($103300 x 7.02358) + ($50000 x 0.50835) ] - $570000

= $1,80,953

Net Present Value = $1,80,953

4. Net present value (NPV) at 10 = $84,011

= [ $103300 x (PVAF 10%,10 Years) + $50000 x (PVF 10%,10 Years) ]-$570000

= [ ($103300 x 6.14457) + ($50000 x 0.38554) ] - $570000

= $84,011

Net Present Value = $84,011

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