AC 55 - Answer 1 Annual depreciation =(Initial Investment...

Info icon This preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Question: Balloons By Sunset (BBS) is considering the purchase of two new hot air balloons so that it can expand its desert sunset tours. Various information about the proposed investment follows: Initial investment (for two hot air balloons) $ 364,000 Useful life 7years Salvage value $ 49,000 Annual net income generated $ 33,124 BBS’s cost of capital 14% Assume straight line depreciation method is used. Required: Help BBS evaluate this project by calculating each of the following: (Number 2 and 4's answers were already found and are listed below) 1 . Accounting rate of return. (Round your answer to 1 decimal place.) Accounting Rate of Return % 2 . Payback period. (Round your answer to 2 decimal places.) Payback Period 4.66 years 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.) Net present value 4. Recalculate the NPV assuming BBS's cost of capital is 15 percent. (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
appropriate factor(s) from the tables provided. Negative amount should be indicated by a minus sign.) Net present value
Image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Answer: 1) Annual depreciation = (Initial Investment - Scrap Value) / Useful Life = ( 364,000 - 49,000) / 7 = $45,000 Average annual Income = Annual Net Income - Depreciation = $ 33,124 - $45,000 = - $11,876 Accounting Rate of Return = - $11,876 / 364,000 = - 3.26% 2) Payback Period = Initial Investment / Annual Cash Flow = 364,000 / 33,124 = 10.99 Years. 3) Calculations Years 1 2 3 4 5 6 7 A Initial Cash Flow-364000 B Annual Cash Flow 33124 33124 33124 33124 33124 33124 3312 C Terminal Cash Flow 4900 D = A+B+C Net Cash Flow-364000 33124 33124 33124 33124 33124 33124 8212 E PV Factor @14% 1.0000 0.8772 0.7695 0.6750 0.5921 0.5194 0.4556 0.399 F = D x E Present Value-364000 29056.14 25487.84 22357.76 19612.07 17203.57 15090.85 3281 G = Sum F Net Present Value-202372 4) Calculations Years 1 2 3 4 5 6 7 A Initial Cash Flow-364000 B Annual Cash Flow 33124 33124 33124 33124 33124 33124 3312 C Terminal Cash Flow 4900 D = A+B+C Net Cash Flow-364000 33124 33124 33124 33124 33124 33124 8212 E PV Factor @15% 1.0000 0.8696 0.7561 0.6575 0.5718 0.4972 0.4323 0.375 F = D x E Present Value-364000 28803.48 25046.5 21779.57 18938.75 16468.48 14320.42 3087 G = Sum F Net Present Value-207769.3...
View Full Document

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern