me straight line depreciation method is used. ired: BBS evaluate this project by calculating each of the following: counting rate of return. ote: Round your answer to 2 decimal places. yback period. ote: Round your answer to 2 decimal places. et present value (NPV). ote: Do not round intermediate calculations. Negative amount should be indicated by a minus earest whole dollar. calculate the NPV assuming BBS's cost of capital is 13 percent. ote: Do not round intermediate calculations. Negative amount should be indicated by a minus earest whole dollar. counting rate of return yback period 7.90 % 5.42 years

EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter10: Capital Budgeting: Decision Criteria And Real Option
Section: Chapter Questions
Problem 11P
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PA11-1 (Algo) Calculating Accounting Rate of Return, Payback Period, Net Present Value, Estimating
Internal Rate of Return [LO 11-1, 11-2, 11-3, 11-4]
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: (Future Value of $1. Present Value of $1, Future Value Annuity of $1, Present Value
Annuity of $1.)
Note: Use appropriate factor(s) from the tables provided.
Initial investment (for two hot air balloons)
Useful life
Salvage value
Annual net income generated
BBS's cost of capital
Assume straight line depreciation method is used.
Required:
Help BBS evaluate this project by calculating each of the following:
1. Accounting rate of return.
Note: Round your answer to 2 decimal places.
2. Payback period.
$ 351,000
1. Accounting rate of return
2. Payback period
3. Net present value
4. Net present value assuming 13% cost of capital
8 years
$ 55,000
$ 27,729
Note: Round your answer to 2 decimal places.
3. Net present value (NPV).
Note: Do not round intermediate calculations. Negative amount should be indicated by a minus sign. Round the final answer to
nearest whole dollar.
10%
4. Recalculate the NPV assuming BBS's cost of capital is 13 percent.
Note: Do not round intermediate calculations. Negative amount should be indicated by a minus sign. Round the final answer to
nearest whole dollar.
7.90 %
5.42 years
Transcribed Image Text:PA11-1 (Algo) Calculating Accounting Rate of Return, Payback Period, Net Present Value, Estimating Internal Rate of Return [LO 11-1, 11-2, 11-3, 11-4] 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: (Future Value of $1. Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) Note: Use appropriate factor(s) from the tables provided. Initial investment (for two hot air balloons) Useful life Salvage value Annual net income generated BBS's cost of capital Assume straight line depreciation method is used. Required: Help BBS evaluate this project by calculating each of the following: 1. Accounting rate of return. Note: Round your answer to 2 decimal places. 2. Payback period. $ 351,000 1. Accounting rate of return 2. Payback period 3. Net present value 4. Net present value assuming 13% cost of capital 8 years $ 55,000 $ 27,729 Note: Round your answer to 2 decimal places. 3. Net present value (NPV). Note: Do not round intermediate calculations. Negative amount should be indicated by a minus sign. Round the final answer to nearest whole dollar. 10% 4. Recalculate the NPV assuming BBS's cost of capital is 13 percent. Note: Do not round intermediate calculations. Negative amount should be indicated by a minus sign. Round the final answer to nearest whole dollar. 7.90 % 5.42 years
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