Linda’s luxury travel (LLT) is considering the purchase of two Hummer limousines
ID: 2526294 • 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) $1,620,000 Useful life 10 years Salvage value $140,000 Annual net income generated 157,140 LLTs cost of capital 15%
Assume straight line depreciation method is used.
Required: Help LLT evaluate this project by calculating each of the following:
1. Accounting rate of return.( round to one decimal place)
2. Payback period.(round to two decimal places)
3. Net present value Linda’s luxury travel (LLT) is considering the purchase of two Hummer limousines. Various information about the proposed investment follows:
Initial investment(2 limos) $1,620,000 Useful life 10 years Salvage value $140,000 Annual net income generated 157,140 LLTs cost of capital 15%
Assume straight line depreciation method is used.
Required: Help LLT evaluate this project by calculating each of the following:
1. Accounting rate of return.( round to one decimal place)
2. Payback period.(round to two decimal places) Linda’s luxury travel (LLT) is considering the purchase of two Hummer limousines. Various information about the proposed investment follows:
Initial investment(2 limos) $1,620,000 Useful life 10 years Salvage value $140,000 Annual net income generated 157,140 LLTs cost of capital 15%
Assume straight line depreciation method is used.
Required: Help LLT evaluate this project by calculating each of the following:
1. Accounting rate of return.( round to one decimal place)
2. Payback period.(round to two decimal places)
Initial investment(2 limos) $1,620,000 Useful life 10 years Salvage value $140,000 Annual net income generated 157,140 LLTs cost of capital 15%
Assume straight line depreciation method is used.
Required: Help LLT evaluate this project by calculating each of the following:
1. Accounting rate of return.( round to one decimal place)
2. Payback period.(round to two decimal places)
3. Net present value
Explanation / Answer
1. Accounting rate of return = 18.8%
Accounting Rate of return = (Cash Flow / Initial Investments) * 100
Depreciation = ($16,20,000 - $1,40,000) / 10 Years = $1,48,000
Cash Flow = Net Income + Depreciation
= $1,57,140 + $1,48,000
= $3,05,140
Accounting Rate of return = (Operating Income / Initial Investments) * 100
= ($305140 / $1620000) * 100
= 18.8 %
2. Payback period = 5.31 Years
= Initial Investment / cash flow
= $16,20,000 / $3,05,140
= 5.31 Years
3. Net present value (NPV) = - $53,967 (Negative)
= [ $3,05,140 x (PVAF 15%,10 Years) + $140000 x (PVF 15%,10Years) ] - $16,20,000
= [ ($3,05,140x5.018768626) + ($140000 x 0.247184706) ] - $16,20,000
=$15,31,427 + $34,606 - $16,20,000
= - $53,967 (Negative)
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