Balloons By Sunset (BBS) is considering the purchase of two new hot air balloons

Question

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: Initial investment (for two hot air balloons) Useful life Salvage value Annual net income generated BBS's cost of capital 383,000 9 years $ 59,000 31,023 9% Assume straight line depreciation method is used Required: Help BBS evaluate this project by calculating each of the following: . Accounting rate of return. (Round your answer to 1 decimal place.) Accounting Rate of Return 2. Payback period. (Round your answer to 2 decimal places.) Payback Period

Explanation / Answer

Solution 1:

Accounting rate of return = Average annual income / Average investments

Average investment = (Cost + Salvage Value) / 2 = ($383,000 + $59,000) / 2 = $221,000

Average annual income = $31,023

Accounting rate of return = $31,023 / $221,000 = 14.0%

Solution 2:

Annual cash inflows = Net income + Depreciation

Annual depreciation = ($383,000 - $59,000) / 9 = $36,000

Annual cash inflows = $31,023 + $36,000 = $67,023

Payback period = Initial investment / Annual cash inflows = $383,000 / $67,023 = 5.71 years

Solution 3:

Solution 4:

Computation of NPV - BBS Particulars Amount Period PV Factor (9%) Present Value Cash Outflows: Initial investment $383,000.00 0 1 $383,000 Present Value of Cash Outflows (A) $383,000 Cash Inflows: Annual cash inflows $67,023.00 1-9 5.995247 $401,819 Salvage Value $59,000.00 9 0.460428 $27,165 Present Value of Cash Inflows (B) $428,985 Net Present Value (B-A) $45,985

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