Question

High Flyers 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 2 balloons) |
$500,000 |

Useful life |
5 years |

Salvage Value |
$150,000 |

Annual net income generated from additional flights |
$60,000 |

Cost of Capital for High Flyers |
11% |

**Help High Flyers evaluate this project by
calculating:**

1. Net Present Value( the long way- see p. 355 for example)

2. Net Present Value (using the excel formula NPV)

3. Recalculate NPV with cost of capital @16%

4. Based on your calculation of NPV, what would you estimate your project’s internal rate of return to be?

Answer #1

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) $ 411,000 Useful life 7 years
Salvage value $ 40,000 Annual net income generated 34,524 BBS’s
cost of capital 7 % Assume straight line depreciation method is
used. Recalculate the NPV assuming BBS's cost of capital is 10
percent. (Future Value of $1,...

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)
$364,000
Useful Life
7 years
Salvage Value
$56,000
Annual Net Income Generated
$28,028
BBS's cost of capital
7%...

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)
$
375,000
Useful life
7
years
Salvage value
$
60,000
Annual net income generated
30,000
BBS’s cost of...

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)
$
525,000
Useful life
9
years
Salvage value
$
57,000
Annual net income generated
43,575
BBS’s cost of capital
10
%
Assume straight line depreciation method is used.
Required:
Help BBS evaluate this project by calculating each of the
following:
1. Accounting...

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)
$
408,000
Useful life
7
years
Salvage value
$
58,000
Annual net income generated
32,640
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...

alloons 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)
$
402,000
Useful life
7
years
Salvage value
$
45,000
Annual net income generated
34,170
BBS’s cost of...

PA11-1 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:
Initial investment (for two hot
air balloons)
$
297,000
Useful life
7
years
Salvage value
$
52,000
Annual net income generated
22,572
BBS’s cost of capital
7
%
Assume...

PA11-1 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:
Initial investment (for two hot
air balloons)
$
475,000
Useful life
8
years
Salvage value
$
51,000
Annual net income generated
41,325
BBS’s cost of capital
10
%
Assume...

PA11-1 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:
Initial
investment (for two hot air balloons)
$
385,000
Useful life
8
years
Salvage
value
$
41,000
Annual net
income generated
31,185
BBS’s cost of
capital
7
%
Assume...

Falcon Crest Aces (FCA), Inc., is considering the purchase of a
small plane to use in its wing-walking demonstrations and aerial
tour business. Various information about the proposed investment
follows:
Initial investment
$
250,000
Useful life
$
10
years
Salvage value
25,000
Annual net income generated
$
5,600
FCA's cost of capital
8
%
1. Accounting rate of return. (Round
your answer to 2 decimal places.)
Accounting Rate of Return
%
2. Payback period. (Round your answer
to 2 decimal...

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