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) 512,000 Useful life Salvage value Annual net income generated BBS's cost of capital 9 years S 44,000 42,496 996 Assume straight line depreciation method is used. Required: Help BBS evaluate this project by calculating each of the following 1. Accounting rate of return. (Round your answer to 1 decimal place.) nti ng Rate of Return 2. Payback period. (Round your answer to 2 decimal places.) Years Payback Period %, Ke$?Hice2cht fall ! 4 YL (Future Val e f 1. Present Value of$1 Future Val eAnnuity of 1 Present Value Annuity $1 1 Use appropriate factor(s) from the tables provided. Do not round intermediate calculations. Negative amount should be indicated by a minus sign. Round the final answer to nearest whole dollar.) Present Value 4. Recalculate the NPV assuming BBS's cost of capital is 12 percent. (Future Value of $1, Present Value of S1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor(s) from the tables provided. Do not round intermediate calculations. Negative amount should be indicated by a minus sign. Round the final answer to nearest whole dollar.) Present Value

Explanation / Answer

1. Accounting rate of Return (ARR) = NET INCOME / INVESTMENT = 42496 / 512000 = 8.30%

2. Annual Depreciation = (512000-44000)/9 = $52000

Annual Cash Inflows = 52000+42496 = $94496

Payback Period = Investment/Annual Cash Flows = 512000/94496 = 5.41

3.Annual cash flows = 94496 ; PV Factor 5.9952 (9% at 9 years)

Present Value of Annual cash flows = 566522.42

Present value of salvage value = 44000x0.4604 = $20257.60

Total Present value =566522.42+20257.60 = $586780.02

Less : Investments = 512000

Net Present Value = 586780.02-512000 = $74780

4.Annual Cash Flows =94496

PV Factor = 5.3282

Present value of Annual Cash flows = 94496x5.3282 = 503493.59

Present value of Salvage Value = 44000x0.3606 = $15866.40

Total Present value = 503493.59+15866.40 = 519359.99

Less : Investments : 512000

Net present value = 519359.99-512000 = $7360

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