Linda\'s Luxury Travel (LLT) is considering the purchase of two Hummer limousine
ID: 2583630 • Letter: L
Question
Linda's Luxury Travel (LLT) is considering the purchase of two Hummer limousines. Various information about the proposed investment follows Initisl investment (2 limoe Useful ife Salvage value Anusl ret inoame gunersted LLT s coat of capital $ 1,380,000 10 years 130.000 128.340 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.) of 2. Payback period. (Round your answer to 2 decimal places.) 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.) Teble or Calculstor Furction Cash Outfiaw (Bngiming of the Yar) Presert Value able ar Calculator Furction: Cash Infiow (for Nexl 10 Yeers) Table Factor Present Value Table ar Calculator Furcion: Cash Inflow for th Year Table Facor Presert Value Total Net Present Val.e 4. Without making any calculations, determine whether the IRR is more or less than 15% Lesthan 15% Greater than 15%Explanation / Answer
1) Accounting Rate of Return (ARR) = (Annual net income generated/Initial investment)*100
Annual net income generated = $128,340
Initial Investment = $1,380,000
ARR = (128,340/1,380,000)*100 = 9.3%
2) Payback period = (cost of investment/Annual net cash flow)
Cost of Investment = $1,380,000
Annual net cash flow = Net annual income generated + Annual Depreciation
Annual Depreciation = (Initial Investment-Salvage Value)/useful life = ($1,380,000-$130,000)/10 years = $125,000
Net annual income generated = $128,340
Annual net cash flow = $128,340+$125,000 = $253,340
Payback Period = $1,380,000/$253,340 = 5.45 years
3) Calculation of Net Present Value
4) IRR is the rate at which net present value is zero. At the rate of 15%, the net present value is negative, thus for making NPV zero, the required discount rate should be lower than 15%.
Therefore, IRR is less than 15%.
Table or Calculator Function: PVF(i%,n) Cash Outflow (Beggining of the year) -$1,380,000 n = 0 years i = 15% Present Value (A) -$1,380,000 Table or Calculator Function: PVAF(i%,n) Cash Inflow (for next 10 years) ($128,340+$125,000) $253,340 n = 10 years i = 15% Table Factor 5.0188 Present value ($253,340*5.0188) (B) 1,271,463 Table or Calculator Function: PVF(i%,n) Cash Inflow (for 10th year) $130,000 n = 10 years i = 15% Table Factor 0.2472 Present Value ($130,000*0.2472) (C) $32,136 Total Net Present Value (B+C-A) -$76,401
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