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:  

Assume straight line depreciation method is used.

What is the accounting rate of return?? ROUND YOUR ANSWER TO 1 DECIMAL PLACE.

What is the payback period?? ROUND YOUR ANSWER TO 2 DECIMAL PLACES.

What is the net present value? DO NOT ROUND INTERMEDIATE CALCULATIONS. NEGATIVE AMOUNT SHOULD BE INDICATED BY A MINUS SIGN. ROUND YOUR ANSWER TO NEAREST WHOLE DOLLAR.

Recalculate the NPV assuming the cost of capital is 13 percent. DO NOT ROUND INTERMEDIATE CALCULATIONS. NEGATIVE AMOUNT SHOULD BE INDICATED BY A MINUS SIGN. ROUND THE FINAL ANSWER TO THE NEAREST WHOLE DOLLAR.

Initial investment (for two hot air balloons) $ 414,000 Useful life 7 years Salvage value $ 43,000 Annual net income generated 36,846 BBS’s cost of capital 10 %

Explanation / Answer

1. Accounting rate of return = 8.9%

Depreciation = ($414000 - 43000) / 7 = $53000

Cash Flow = Net Income + Depreciation

                   = $36846 + 53000 = 89846

Accounting Rate of return = (Net Income / Initial Investments) * 100

= ($36846 / 414000) * 100 = 8.9%

2. Payback period = 4.61 Years

= Initial Investment / cash flow

= $414000 / 89846 = 4.61 Years

3. Net present value (NPV) at 10% = $45,474

= [ $89846 x (PVAF 10%,7 Years) + $43000 x (PVF 10%,7 Years) ] - $414000

= [ ($89846 x 4.86842 ) + ($43000 x 0.51316) ] - $414000

= $45,474

4. Net present value (NPV) at 13% = $1,631

= [ $89846 x (PVAF 13%,7 Years) + $43000 x (PVF 13%,7 Years) ] - $414000

= [ ($89846 x 4.42261 ) + ($43000 x 0.42506) ] - $414000

= $1,631

Related Questions

Navigate

• Browse (All)
• Browse B
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.