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) 423,000 10 years Useful life Salvage value Annual net income generated BBS's cost of capital S 43,00O 35,955 9% Assume straight line depreciation method is used Required Help BBS evaluate this project by calculating each of the following 1. Accounting rate of return. (Round your answer to 1 decimal place.) Rate of Return 2. Payback period. (Round your answer to 2 decimal places.) Period Years 3. Net present value (NPV) Value Annuity of $1, Present Value Annuity of $1.) (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.) 1, Present Value of $1, Future t Present Value 4. Recalculate the NPV assuming BBS's cost of capital is 12 percent. (Future Value of $1, Present Value of $1, Future Value 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.) t Present Value

Explanation / Answer

1. Accounting Rate of Return=Annual Income/Initial Investment

                                           =$35,955/$4,23,000=8.50%

2. Payback Period(Without considering Time value of money)

= Initial Investment/Net Income

=$4,23,000/$35,955=11.75 Years

3. Net Present Value= P.V of Net Income($35,955, 9%, 10 Years)+PV of Salvage($43,000, 9% at the end of 10 year)- Initial Investment

=6.42*$35,955+0.42*$43,000-$4,30,000

=$2,48,910.55+$18,163.66-$4,30,000

=$1,81,089.45

4. Net Present Value= P.V of Net Income($35,955, 12%, 10 Years)+PV of Salvage($43,000, 12% at the end of 10 year)- Initial Investment

=5.65*$35,955+0.32*$43,000-$4,30,000

=$+$-$4,30,000

=$2,13,001.38

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