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:  

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.)

        

2. Payback period. (Round your answer to 2 decimal places.)

         

3. Net present value (NPV). (Future Value of $1, Present Value of $1, Future 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.)

         

4. Recalculate the NPV assuming BBS's cost of capital is 15 percent. (Future Value of $1, Present Value of $1, Future 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.)

    

Initial investment (for two hot air balloons) $ 449,000 Useful life 8 years Salvage value $ 57,000 Annual net income generated 39,512 BBS’s cost of capital 12 %

Explanation / Answer

Req 1: Annual Net Income generated: 39512 Divide: Average Investment 253000 (449000+57000)/2 Accounting Rate of return 15.62% Req 2: Annual Net income: 39512 Add: Depreciation (449000-57000)/8 49000 Annual Inflows 88512 Initial Investment 449000 Divide: Annual Inflows 88512 Payback period 5.07 Req 3: NPV at 12%: Annual Inflows 88512 Annuity present value factor at 12% for 8yrs 4.9676 Present value of inflows 439692.2 Present value of Salvage 23022.3 (57000*0.4039) Present value of total inflows 462714.5 Less: Initial Investment 449000 Net present value 13714.51 Req 4: NPV at 15% Annual Inflows 88512 Annuity present value factor at 15% for 8yrs 4.4873 Present value of inflows 397179.9 Present value of Salvage 18633.3 (57000*0.3269) Present value of total inflows 415813.2 Less: Initial Investment 449000 Net present value -33186.8

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