Pad * 90%. 12:01 PM ezto.mheducation.com Linda\'s Luxury Travel (LLT) is conside
ID: 2530928 • Letter: P
Question
Pad * 90%. 12:01 PM ezto.mheducation.com Linda's Luxury Travel (LLT) is considering the purchase of two Hummer limousines. Various information about the proposed investment follows $1,800,000 Initial investment (2 limos) Useful life Salvage value Annual net income generated LLT's cost of capital 10 years $140,000 180,000 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 your percentage answer to 1 decimal place.) unting Rate of Return 2. Payback period. (Round your answer to 2 decimal places.) Payback Period Years 2 decimal places required 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. Do not round intermediate calculations. Cash Outflows and negative amounts should be indicated by a minus sign. Round your "Present Values" to the nearest whole dollar amount.)Explanation / Answer
1. Accounting rate of return = 10%
Accounting Rate of return = (Net Income / Initial Investments) * 100
Depreciation = ($18,00,000 - $1,40,000) / 10 Years = $1,66,000
Cash Flow = Net Income + Depreciation
= $1,80,000 + $1,66,000
= $3,46,000 per year
Accounting Rate of return = ($1,80,000 / $18,00,000) * 100
= 10%
2. Payback period = 5.20 Years
= Initial Investment / cash flow
= $18,00,000 / $3,46,000
= 5.20 Years
3.Net Present Value
Cash flow (Beginning of the year)
$18,00,000
N
0
I
15%
Present Value
$18,00,000
Cash flow(For next 10 years)
$346000
N
10
I
15%
Table Factor
5.0187
Present Value
$17,36,470
Cash flow(For 10th years)
$140000
N
10
I
15%
Table Factor
0.2472
Present Value
34608
Total Net Present Value
($28,922) Negative
4. “IRR Will be Less than 15%”
Cash flow (Beginning of the year)
$18,00,000
N
0
I
15%
Present Value
$18,00,000
Cash flow(For next 10 years)
$346000
N
10
I
15%
Table Factor
5.0187
Present Value
$17,36,470
Cash flow(For 10th years)
$140000
N
10
I
15%
Table Factor
0.2472
Present Value
34608
Total Net Present Value
($28,922) Negative
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