Q: Balloons By Sunset (BBS) is considering the purchase of two new hot air ballo
ID: 2473052 • Letter: Q
Question
Q:
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.
Accounting rate of return. (Round your answer to 1 decimal place.)
Payback period. (Round your answer to 2 decimal places.)
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. Negative amount should be indicated by a minus sign.)
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. Negative amount should be indicated by a minus sign.)
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:
Explanation / Answer
Annual depreciation under straight line method
= (cost - dalvage value ) / number of useful life
= $364000 - $49000) / 7 years
= $45000
Net cash inflow per year = annual net income + annual depreciation = $33124 + $45000 = $78124
1) Accounting rate of return
= annual net income / Average Investment)
= $33124 / [($364000 + $49000)/2]
=16.04%
2)
Payback period
= Initial Investment / annual net cash inflow
= $364000 / $78124
= 4.66 years
3)
NPV
= -$364000 + $78124 x PVIFA (14%, 7) + $49000 x PVIF (14%, 7)
= -$364000 + $78124 x 4.288 + $49000 x 0.4
= - $9404
4)
NPV
= -$364000 + $78124 x PVIFA (15%, 7) + $49000 x PVIF (15%, 7)
= -$364000 + $78124 x 4.161 + $49000 x 0.0.376
= -37084
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