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

Question

3. Linda's Luxury Travel (LLT) is considering the purchase of two Hummer limousines. Various information about the proposed investment follows: $1,260,000 Initial investment (2 limos) Useful life Salvage value Annual net income generated LLT's cost of capital 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.) Answer is complete but not entirely correct. 14.00% 2. Payback period. (Round your answer to 2 decimal places.) Answer is complete but not entirely correct. Payback Period 10.98Years

Explanation / Answer

Accounting rate of return = Net income/initial investment*100

Therefore in above case

Net income is = 114,660

Initial Investment = 1,260,000

114,600/1,260,000*100=9.1%

Payback Period = Initial investment/Annual cash flow

Initial Investment = 1,260,000

Annual cash flow = 114,660

1,260,000/114,660 = 10.98 Years

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