Question

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

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

 Initial investment (2 limos) \$ 1,140,000 Useful life 10 years Salvage value \$ 130,000 Annual net income generated \$ 101,460 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%.

 Accounting Rate of Return %
 Payback Period years

Calculate net present value. (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. Cash Outflows and negative amounts should be indicated by a minus sign. Round your "Present Values" to the nearest whole dollar amount.)

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 Table or Calculator Function: Cash Outflow (Beginning of the Year) n = i = % Present Value Table or Calculator Function: Cash Inflow (for Next 10 Years) n = i = % Table Factor Present Value Table or Calculator Function: Cash Inflow (for 10th Year) n = i = % Table Factor Present Value Total Net Present Value
 IRR

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