Linda\'s Luxury Travel (LLT) is considering the purchase of two Hummer limousine

Question

Linda's Luxury Travel (LLT) is considering the purchase of two Hummer limousines. Various information about the proposed investment follows: Initial investment (2 limos) Useful life Salvage value Annual net income generated LLT's cost of capital $1,200,000 10 years $130,000 108,000 14% Assume straight line depreciation method is used. Required Help LLT evaluate this project by calculating each of the following: 1. Accounting rate of returm. (Round your percentage answer to 1 decimal place,) Accounting Rate of Return 2. Payback period. (Round your answer to 2 decimal places.) Payback Period Years

Explanation / Answer

1). Rate of Return :-

Rate of Return = Net Income / Initial Investment

= $108000 / $1200000

= 9%

2) Payback Period :-

Payback Period = Initial Investment / Cash Flow

= $1200000 / $215000

= 5.58 Years

Note : Cash Flow = Net Income + Depreciation = $108000 + (($1200000 - $130000)/10) = $215000

3). Net Present Value :-

4). IRR :-

IRR is Less than 14%

Particulars Table or Calculator Function :- Cash Outflow (Beginning of year) $1200000 n = 0 i = 15% Present Value $1740000 Table or Calculator Function : Cash Inform (For next 10 year) $215000 n = 10 i = 14% Table Factor 5.216 Present Value $1121440 Cash Infow (For 10th Year) $130000 n = 10 i = 14% Table Factor 0.2697 Present Value $35061 Total Net Present Value($1200000 - ($1121440+$35061)) -43499

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