[The following information applies to the questions
displayed below.]
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 | $ | 260,000 | |||||
| Useful life | $ | 10 | years | ||||
| Salvage value | 25,000 | ||||||
| Annual net income generated | $ | 5,800 | |||||
| FCA's cost of capital | 7 | % | |||||
Assume straight line depreciation method is used.
rev: 04_20_2017_QC_CS-86552
3.
value:
2.50 points
Required information
Required:
Help FCA evaluate this project by calculating each of the
following:
1. Accounting rate of return. (Round your
answer to 2 decimal places.)
4.
value:
2.50 points
Required information
2. Payback period. (Round your answer
to 2 decimal places.)
5.
value:
3.00 points
Required information
3. Net present value (NPV). (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. Negative amount should be indicated by a
minus sign. Round the final answer to nearest whole
dollar.)
rev: 04_20_2017_QC_CS-86552
6.
value:
2.00 points
Required information
| 5. | Without doing any calculations, what is the project's IRR? |
Between 3% and 7%
Less than 3%
Greater than 7%
Depreciation under Straight line method = (cost - salvage value) / useful life
= (260,000 - 25,000) / 10
= 23,500
1.
Accounting rate of return = Annual net income / Initial investment
= 5,800 / 260,000
= 2.23%
2.
Annual cash flow = Annual net income + Depreciation
= 5,800 + 23,500
= 29,300
Payback period = Investment / Annual cash flow
= 260,000 / 29,300
= 8.87 years.
3.
PVAF of 7% for 10 years = 7.024
PVAF of 7% in year 10 = 0.508
Present value of cash inflows = (29,300*7.024) + (25,000*0.508)
= 205,803.2 + 12,700
= 218,503.2
Present value of cash outflows = 260,000
Net present value = Present value of cash inflow - Present value of cash outflows
= 218,503.2 - 260,000
= (41,496.8)
Net present value = (41,497)
5.
IRR is where Net present value is 0.
As Net present value is negative, IRR is below 3%
The answer is less than 3%.
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