E11-4 Calculating Accounting Rate of Return, Payback Period, Net Present Value,

Question

E11-4 Calculating Accounting Rate of Return, Payback Period, Net Present Value, Estimating Internal Rate of Return [LO 11-1, 11-2, 11-3, 11-4]

Linda’s Luxury Travel (LLT) is considering the purchase of two Hummer limousines. Various information about the proposed investment follows:   

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.)



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.)

   

4. Without making any calculations, determine whether the IRR is more or less than 15%.

Initial investment (2 limos) $ 1,680,000 Useful life 10 years Salvage value $ 140,000 Annual net income generated 164,640 LLT’s cost of capital 15 %

Explanation / Answer

Answer :- Accounting Rate of Return = Annual Net Income / Initial Investment =164640 / 1680000 = 9.8%

Pay Back Period = Intial Investment / Annual Net cash flow

Initial Investment / (Net income +depreciation)

1680000/164640 + (1680000-140000) /10 = 5.27 years

3) Net Present Value

4) LESS THAN 15%

Year Annual Cash flow Pv Factor @ 15 % Present Value 0 (1680000) (1680000) 1-10 (1680000-140000)10 +164640=318640 5.0188 1599190 10 140000 0.2472 34608 NPV (46202 )

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