# AC 55 - Question Balloons By Sunset(BBS is considering the...

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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

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appropriate factor(s) from the tables provided. Negative amount should be indicated by a minus sign.) Net present value
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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...
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