useful life 10 years salvadged value $10,000 anual net income generated $4,200 [
ID: 2408276 • Letter: U
Question
useful life 10 years
salvadged value $10,000
anual net income generated $4,200
[The following information applies to the questions clisplayed below.) Falcon Crest Aces (FCA), Inc., is considering the purchase of a small plane to use in its wing-walking demonstrations and aerial tour business. Various information about the proposed investment follows: $ $ Iniiul S TIL Useful life Suluge value Aunlual Inst I NT? EITETSt= FCA's cost of capital 110.000 10 years 101000 1.200 10% $ Assume straight line depreciation method is usedExplanation / Answer
Requirement – 3, Net Present Value at 10% = -$18,892 [ Negative NPV]
Annual Net Cash Flow = Net Income + Depreciation
Depreciation = [ $110,000 – 10,000 ] / 10 Years = $10,000 per year
Annual Net Cash Flow = $4,200 + 10,000 = $14,200
Net Present Value [NPV] = [ Present Value of Annual Cash Flow + Present Value of Salvage Value ] – Investment Amount
= $14,200 [ PVIF 10%, 10 Years] + $10,000 [ PVF 10%, Year ] - $110,000
= [$14,200 x 6.144568] + [ 10,000 x 0.385543] - 110,000
= $ 87,252.85 + 3,855.43 – 110,000
= -$18,891.71
= -$18,892 [ Negative NPV]
Requirement – 4, Net Present Value at 6% = $97.18 [ Positive NPV]
Net Present Value [NPV] = [ Present Value of Annual Cash Flow + Present Value of Salvage Value ] – Investment Amount
= $14,200 [ PVIF 6%, 10 Years] + $10,000 [ PVF 6%, Year ] - $110,000
= [$14,200 x 7.360087] + [ 10,000 x 0.55839] - 110,000
= $104,513.24 + 5,583.95 – 110,000
= $97.18
= $97 [ Positive NPV]
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