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: nitial investment (2 limos) $1,500,000 Useful life Salvage value Annual net income generated LLT's cost of capital 10 years $ 140,000 142,500 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.) Accounting Rate of Return 2. Payback period. (Round your answer to 2 decimal places.) Payback Perñiod Years

Explanation / Answer

1 Accounting Rate of Return Formula               = Average Accounting Profit/ Average Investment Annual Depreciation = (Initial Investment Scrap Value) ÷ Useful Life in Years Annual Depreciation = ($1,500,000 $140,000) ÷ 10 $136,000 Average Accounting Income = $142,500 $136,000 = $6,500 Accounting Rate of Return = $6,500 ÷ $1,500,000 0.4% 2 Payback Period Formula             = Initial Investment / Cash Inflow per Period             = $ 1,500,000 /$ 142,500             = 10.53 Years 3 Net Present value Table or Calculator Function Cash outflow = NPV Cash Outflow (Beginning of the year) (1,500,000) n = 0 i= 14 % Present value (1,500,000) Table or Calculator Function Present value of Annuity of $1 Cash inflow (for next 10 years) 142,500 n = 10 i= 14 % Table Factor 5.2161 Present value 743,294.25 Table or Calculator Function Present value $1 Cash inflow (for 10th year) 140,000 n = 1 i= 14 % Table Factor 0.2697 Present value 37,758.00 Total Net Present value (718,947.75)

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