Falcon Crest Aces (FCA), Inc., is considering the purchase of a small plane to u

Question

Falcon Crest Aces (FCA), Inc., is considering the purchase of a small plane to use in its wing-walking demonstrations and aerial tour business. Various information about the proposed investment follows Initiel invessment Savage valae FCAs coal of capital 0 years 5,000 ,800 Assume straight line depreciation method is used. Required information 0.50 points Required Help FCA evaluate this project by calculating each of the following 1. Accounting rate of return. (Round your answer to 2 decimal places.) eBook & Resources Leaming Obynctive: 11-01 ming Objoctivn:11-403 Claulain t prosent vak Cakulale ure aGGountin rale describe why is superior to thy olfecapital of relurn and describe its Worksheet echniques Difficulty: 3 Hard Leaming Otynctive: 11.02 olculate the payhack period 1ming Cher ive: 11.04 Predict the rwrnal mnt and dlosrlationship to net presant 0.50 points 2. Payback period. (Round your answer to 2 decimal places.) years eBook & Resources Worksheet Leaming Objeclive: 1101 Learning Objective: 11-03 Calculale nel present value Celculate he accounting rate describe why t is superior to the other cepitel hudgeting of return and describe its major weaknesses Leaming Objective: 11-02 Leaning Objective: 11-04 Predict the intemal rale Calculate the payback period and describe its relationship to net present and describe es major Dafficulty: 3 Hard

Explanation / Answer

1) Accounting rate of return = Average accounting income / Average investment Average accounting income = $6800 Average investment = ($310000-$25000)/2 = $285000 Accounting Rate of Return = $6800/$142500 = 4.77% 2) Payback period = Initital investment / Cash flow per annum Cash flow per annum = Average net operating income + depreciation Annual Depreciation = (Initial Investment - Scrap Value) ÷ Useful Life in Years Annual Depreciation = (310000-25000)/10 = $28500 Cash flow per annum = 6800+28500 = $35300 Payback period = $310000/$35300 = 8.78 years 3) NPV = Present value of cash inflows - Initial investment Present value of cash inflows = $35300*PVIFA @ 7% 10 years + $25000*PVIF @7% 10 years Present value of cash inflows = $35300*7.0236 + $25000*0.5083 = 247932+12709 = $260641 NPV = $260641-$310000 = (-$49359) 4) NPV = Present value of cash inflows - Initial investment Present value of cash inflows = $35300*PVIFA @ 3% 10 years + $25000*PVIF @3% 10 years Present value of cash inflows = $35300*8.5302 + $25000*0.7441 = 301116+18602 = $319718 NPV = $319718-$310000 = $9718

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