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.) (Use appropriate factor(s) from the tables provided.)

Initial investment (for two hot air balloons) $ 399,000
Useful life 9 years
Salvage value $ 48,000
Annual net income generated 30,324
BBS’s cost of capital 8 %

Assume straight line depreciation method is used.

Required:
Help BBS evaluate this project by calculating each of the following:

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). (Do not round intermediate calculations. Negative amount should be indicated by a minus sign. Round the final answer to nearest whole dollar.)
4. Recalculate the NPV assuming BBS's cost of capital is 11 percent. (Do not round intermediate calculations. Negative amount should be indicated by a minus sign. Round the final answer to nearest whole dollar.)

I'm mostly confused on NPV

Question

24-04-2022
Mathematics

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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.) (Use appropriate factor(s) from the tables provided.)

Initial investment (for two hot air balloons) $ 399,000
Useful life 9 years
Salvage value $ 48,000
Annual net income generated 30,324
BBS’s cost of capital 8 %

Assume straight line depreciation method is used.

Required:
Help BBS evaluate this project by calculating each of the following:

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). (Do not round intermediate calculations. Negative amount should be indicated by a minus sign. Round the final answer to nearest whole dollar.)
4. Recalculate the NPV assuming BBS's cost of capital is 11 percent. (Do not round intermediate calculations. Negative amount should be indicated by a minus sign. Round the final answer to nearest whole dollar.)

I'm mostly confused on NPV

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maheshpatelvVT maheshpatelvVT · Answer 1 · 2022-05-05T12:05:59+02:00

The accounting rate of return is 7.6%, the payback period is 5.755 years, the Net present value is $58,072, and the net present value(11%) is $3611.

What is NPV?

The Net Present Value (NPV) is a corporate finance technique for analyzing the viability of an investment or a firm. It's the disparity between the anticipated cash flows and the initial investment. Let's look more closely at NPV.

We can calculate the accounting rate of return as follows:

Accounting rate of return = (Annual net Income/ Average Investment)×100

=(30,324/399,000)×100

= 7.6%

For Payback period:

Payback = Initial investment/ Annul cash flow

Annual cash flow = Annual net income + Depreciation

Deprecition = cost - salvage value/useful life

= (399,000-48,000)/9

= $39,000

Annual cash flow = 30,324 + 39,000 = 69324

Payback= 399,000/69324

= 5.755 years

For NPV:

NPV = Total present value of investment - initial investment

= 69324×PVIFA(8%, 9 years)+48,000×PV(8%, 9 years) - 399,000

= 69324×6.2469+24,011.95 - 399,000

= $58,072

For Net value recalculate if the cost of capital is 11%

NPV = Total present value of investment - initial investment

= 69324×PVIFA(11%, 9 years)+48,000×PV(11%, 9 years) - 399,000

= 69324×5.5370+18,764.39 - 399,000

= 3610.988

= $3611

Thus, the accounting rate of return is 7.6%, the payback period is 5.755 years, the Net present value is $58,072, and the net present value(11%) is $3611.

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