Question

Linda’s Luxury Travel (LLT) is considering the purchase of two Hummer limousines. Various information about the proposed investment follows:   

Initial investment (2 limos)	$	1,560,000
Useful life		10	years
Salvage value	$	140,000
Annual net income generated	$	149,760
LLT’s cost of capital		14	%

Assume straight line depreciation method is used.     

Required:

Help LLT evaluate this project by calculating each of the following:

1. Accounting rate of return.

2. Payback period.

3. Net present value.

4. Without making any calculations, determine whether the IRR is more or less than 14%.

Answer 1

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