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)	$	1,140,000
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

Answer 1