Linda\'s Luxury Travel (LLT) is considering the purchase of two Hummer limousine

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) Useful life Salvage value Annual net income generated LLT's cost of capital 1,260,000 10 years S 130,000 114,660 14% 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.) ounting Rate of Return 2. Payback period. (Round your answer to 2 decimal places.) back Period Years

Explanation / Answer

4. IRR is lesser than 14 % because at IRR, NPV will be 0 and NPV will become 0 only when IRR is less than expected rate of return

1. Accounting rate of return= Average annual profit/Average Investment Average annual profit: 114660*14%= 16052 Average Investment= 1,260000/10= 126000 Therefore, ARR= 16052/126000*100= 12.74%

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