Please answer the following question in it\'s entirety as it is all one question

Question

Please answer the following question in it's entirety as it is all one question in totality.

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) Useful life Salvage value Annual net income generated BBS's cost of capital $ 443,000 9 years $ 56,000 41,199 Assume straight line depreciation method is used. Required: Help BBS evaluate this project by calculating each of the following: . Accounting rate of return. (Round your answer to 1 decimal place.) Accounting Rate of Return

Explanation / Answer

1. Accounting rate of return = 9.3%

Depreciation = ($443000 - 56000) /9 = $43000

Cash Flow = Net Income + Depreciation

                   = $41199 + 43000 = $84199

Accounting Rate of return = (Net Income / Initial Investments) * 100

= ($41199 / 443000) x 100 = 9.3%

2. Payback period = 5.26 Years

= Initial Investment / cash flow

= $443000 / 84199 = 5.26 Years

3. Net present value (NPV) at 8% = $1,10,996

= [ $84199 x (PVAF 8%,9 Years) + $56000 x (PVF 8%,9 Years) ] - $443000

= [ ($84199 x 6.24689 ) + ($56000 x 0.50025) ] - $443000

= $1,10,996

4. Net present value (NPV) at 11% = $45,106

= [ $84199 x (PVAF 11%,9 Years) + $56000 x (PVF 11%,9 Years) ] - $443000

= [ ($84199 x 5.53705 ) + ($56000 x 0.39092) ] - $443000

= $45,106

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