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 is desert sunset tours. Various information about the proposed investment follows nitial investment (for two hot air balloons) Ucctul Iife Salvage value Annual net inoome genera:ed BBS's cost of capital 357.000 yeara 5 50.000 29,831 Assume straight line depreciation method is used Required: Help BBS evaluate this project by calculating each of the following: . Accounting rale of relurn. (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 Valuc of $1. Future Valuc Annuity of $1. Present Valus Annuity of $1.) (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) 4. Recalculate the NPV assuming BBS's cost of capital is 12 percent. (Euture Value of $1. Present Value ofS1, Euture Va ue Annuity of $1, Present Value Annuity of s1) (Use appropriate factor(s) 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

Depreciation = (cost - salvage ) / life = (357000 - 56000 ) / 7 = 43000

Accounting profit = 29631 ( given)

1. Accounting rate of return = Accounting profit / Investment * 100 = 8.3 % .............final answer

2. PAYBACK PERIOD

Annual cash inflow = Net income + Depreciation = 29631 + 43000 = 72631

Payback period = Investment / annual cash inflow = 357000 / 72631 = 4.92 Years ..........final answer

3. NPV

4. Revised NPV

Year     CF        DF      PV 0 -357000 1 -357000 1 72631 0.917431 66633.94 2 72631 0.84168 61132.06 3 72631 0.772183 56084.46 4 72631 0.708425 51453.63 5 72631 0.649931 47205.17 6 72631 0.596267 43307.49 7 128631 0.547034 70365.56 NPV 39182

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