Linda’s Luxury Travel (LLT) is considering the purchase of two Hummer limousines
ID: 2480445 • Letter: L
Question
Linda’s Luxury Travel (LLT) is considering the purchase of two Hummer limousines. Various information about the proposed investment follows: Initial investment (2 limos) $ 600,000 Useful life 8 years Salvage value $ 100,000 Annual net income generated 48,000 LLT’s cost of capital 12 % Assume straight line depreciation method is used. Required: Help LLT evaluate this project by calculating each of the following:
Accounting Rate of Return _______________%
Payback period__________years
3. Net present value. (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.) Table or Calculator Function: Cash Outflow (Beginning of the Year) n = i = % Present Value Table or Calculator Function: Cash Inflow (for Next 8 Years) n = i = % Table Factor Present Value Cash Inflow (for 8th Year) n = i = % Table Factor Present Value Total Net Present Value
Explanation / Answer
1 Accounting Rate of return Average return/average investment Average return Profit after tax/Life of investment 48000/600000 8% 2 Payback Period Year Cash Flow Cummulative Cash Flow Year 0 -600,000 -600,000 Year 1 110,500 -489,500 Year 2 110,500 -379,000 Year 3 110,500 -268,500 Year 4 110,500 -158,000 Year 5 110,500 -47,500 Year 6 110,500 63,000 Year 7 110,500 173,500 Year 8 210,500 384,000 Cash Flow (Depreciation +yearly) 5+(47500/110500) 5.430 Years 3 NPV Year Cash Flow NPV Year 0 -600,000 -600,000 Year 1 110,500 98,661 Year 2 110,500 88,090 Year 3 110,500 78,652 Year 4 110,500 70,225 Year 5 110,500 62,701 Year 6 110,500 55,983 Year 7 110,500 49,985 Year 8 210,500 85,017 -10,687 Formula for NPV= Present cash inflow*(1+% of return)^-t IRR is less than 12 %
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