Falcon Crest Aces (FCA), Inc., is considering the purchase of a small plane to u
ID: 2514718 • Letter: F
Question
Falcon Crest Aces (FCA), Inc., is considering the purchase of a small plane to use in its wing-walking demonstrations and aerial tour business. Various information about the proposed investment follows:
Assume straight line depreciation method is used.
Help FCA evaluate this project by calculating:
1.) Accounting rate of return and payback period,
2.) Net present value (NPV). Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1 and Recalculate FCA's NPV assuming the cost of capital is 3% percent,
Initial investment $ 140,000 Useful life $ 10 years Salvage value 10,000 Annual net income generated $ 3,400 FCA's cost of capital 6 %Explanation / Answer
Cost = 140,000
Salvage value = 10,000
Useful life = 10 years
Depreciation under the Straight line method = (cost - salvage value) / useful life
= (140,000 - 10,000) / 10
= 13,000
Annual cash flows = Annual net income + Depreciation
= 3,400 + 13,000
= 16,400
1.
Accounting rate of return = Net income / Investment
= 3,400 / 140,000
= 2.43%
Payback period = Initial investment / Annual cash flows
= 140,000 / 16,400
= 8.54 years
2.
Prsesnt value of cash inflows = (16,400 * PVAF of 3% for 9 years) + (26,400 * PAVF of 3% in year 10)
= (16,400 * 7.786) + (26,400 * 0.744)
= 127,690.4 + 19,614.6
= 147,332
Present value of cash outflows = 140,000
Net present value = Present value of cash inflows - Present value of cash outflows
= 147,332 - 140,000
= 7,332
(*) Cash flows in year 10 = Net income + Depreciation + Salvage value
= 3,400 + 13,000 + 10,000
= 26,400
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