E11-4 Calculating Accounting Rate of Return, Payback Period, Net Present Value,

Question

E11-4 Calculating Accounting Rate of Return, Payback Period, Net Present Value, Estimating Internal Rate of Return LO 11-1, 11-2, 11-3, 11-4] 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 $1,380,000 10 years S 130,000 128,340 15% Assume straight line depreciation method is used. Required: Help LLT evaluate this project by calculating each of the following 1.Accounting rate of return. (Round your percentage answer to 1 decimal place.) Rate of Return 2. Payback period. (Round your answer to 2 decimal places.) yback Period Years

Explanation / Answer

Annual Income: 128340 Average Investment (1380000+130000)/2 = 755000 Annual depreciation = (1380000-130000)/10 = 125000 Annual Cash inflows (128340+125000)= 253340 Accounting rate of return: Annual net income / Average investment *100 (253340 / 755000) *100 = 33.55% Paybakck period: Initial Investmemnt / Annual inflows 1380000 /253340 = 5.45 years NPV: Cash outflows -1380000 n= 0 i= 15% Present value -1380000 Cash inflws(for ten year) 253340 n= 10 i= 15% Table factor 5.0188 Present value 1271463 Cash inflws(for tenth year) 130000 n= 10 i= 15% Table factor 0.2472 Present value 32136 Total Net present value -76401.2 Req 4: Hence, IRR is less than 15%

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