Balloons By Sunset (B8S) is considering the purchase of two new hot air balloons

Question

Balloons By Sunset (B8S) is considering the purchase of two new hot air balloons so that R can expand its desert sunset tours. Various information about the proposed investment folows Intial investment (for two hot air baloons} Useful Iife Salvage value Annual net income generated BBS's cost of capital 397,000 years 55,000 36,127 9% Assume straight ine 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 2 Payback period. (Round your answer to 2 decimal places Years 3. Net present value (NPV), (Future Value of $1. Present Value of S1. Future Value Annuity of 51, Present Value Annuity of 51.)(Use appropriate factoris) from the tables provided. Do not round intermediate calculations. Negative amount should be indicated by a minus sign. Round the final answer to nearest whole dollar) 4. Recalculate the NPV assuming BBS's cost of capital is 12 percent (Fubure Value of $1, Present Value of S1, Future Value Annuity of $1, Present Value Annuity of S1.) (Use appropriate factorts) from the tables provided. Do not round intermediate calculations. Negative amount should be indicated by a minus sign. Round the final answer to nearest whole dollar.)

Explanation / Answer

Initial Investment = $397,000

Useful life = 9 years

Salvage Value = 55,000

Annual Net Income = 36,127

Cost of Capital = 9%

1. ARR = (Average Net Income / Average Investment ) * 100 = (36,127 / 397,000) * 100 = 9.1%

2.  Annual cash inflows = Annual Net Income + Depreciation Expense

Depreciation = 397,000 - 55,000 / 9 = 38,000

So, Annual Cash Inflows = 36,127 + 38,000 = 74,127

Investment = 397,000 - 55,000 = 342,000

Payback Period = Investment Required for the project / Net Annual Cash Inflows

= 342,000 / 74,127 = 4.613years

3. PV of cash inflows = 74,127 * PVAF (@ 9% for 9 years) = 74,127 * 5.99525 = 444,430.28

Cash Outflow = 397,000

NPV = 444,430.28 - 397,000 = 47,430.28

4. PV of cash inflows = 74,127 * PVAF (@ 12% for 9 years) = 74,127 * 5.328525 = 394,987.57

Cash Outflow = 397,000

NPV = 394,987.57 - 397,000 = (2012.42)

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