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:     

Assume straight line depreciation method is used.

1. Accounting rate of return. (Round your answer to 2 decimal places.)

2. Payback period. (Round your answer to 2 decimal places.)

3. Net present value (NPV). (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. Negative amount should be indicated by a minus sign. Round the final answer to nearest whole dollar.)
4. Recalculate FCA's NPV assuming the cost of capital is 3% percent. (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. Round your final answer to the nearest whole dollar amount.)

Between 3% and 8%

Greater than 8%

Less than 3%

Initial investment $ 300,000 Useful life $ 10 years Salvage value 25,000 Annual net income generated $ 6,600 FCA's cost of capital 8 %

Explanation / Answer

depreciaiton = (300000-25000)/10 = 27500

Accounting rate of return= average accounting profit / investment =(6600-27500)/300000 = -6.97%

payback period

net annual cash flows = 6600+27500 = 34100

payback period = 8-(-27200/34100) = 8.80 years

Net present value (8%) = -pv of initial cost + pv value of cash inflows = -300000+34100*pvifa (8%,10yrs) = -300000+(34100*6.7101) = -71186

Net present value (3%) = -pv of initial cost + pv value of cash inflows = -300000+34100*pvifa (3%,10yrs) = -300000+(34100*8.5302) = -9120

IRR is below 3% (because at 3% also npv is negative, it means IRR should be lower than 3%)

year cashflows cumm. Cash flows 0 -300000 -300000 1 34100 -265900 2 34100 -231800 3 34100 -197700 4 34100 -163600 5 34100 -129500 6 34100 -95400 7 34100 -61300 8 34100 -27200 9 34100 6900 10 34100 41000

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