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