[The following information applies to the questions displayed below.] Falcon Cre

Question

[The following information applies to the questions displayed below.] Falcon Crest Aces (FCA), Inc., is considering the purchase of a small plane to use in its wingwalking demonstrations and aerial tour business. Various information about the proposed investment follows: $270,000 Initial investment Useful life Salvage value Annual net income generated FCA's cost of capital 10 years $25,000 $6,000 7% Assume straight line depreciation method is used. 8. Required: Help FCA evaluate this project by calculating each of the following: 1. Accounting rate of return. (Round your answer to 2 decimal places.) Accounting Rate of Return

Explanation / Answer

Accounting rate of return = Income/ investment = 6000/270000 = 2.22%

Payback period

cash Inflow each year = net incom + depriciation = 6000 + (270000- 25000)/10 = 30500

Now

The recovery happens between 8 and 9year

so, PBP = 8 years + 245000 - 244000 / 30500 = 8.0328 years

NPV = Pv of cash inflow - Cash outflow

= 30500 PVIFA (7%,10) - 270000 = 214219 - 270000 = -55780

since NPV is negative , reject the project

When cost of capital was 3%

30500 PVIFA (3%,10) - 270000 = 260171 - 270000 = -9829

Even now, NPV is negative , reject the project

30500 PVIFA (7%,10) - 270000 = 214219 - 270000 = 55780

year Cash inflow Cummulative cash inflow 1 30500 30500 2 30500 61000 3 30500 91500 4 30500 122000 5 30500 152500 6 30500 183000 7 30500 213500 8 30500 244000 9 30500 274500 10 30500 305000

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