Question

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 places.)

Payback Period

years

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.)

Net Present Value

4. Recalculate FCA's NPV assuming the cost of capital is 3% percent. (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. Round your final answer to the nearest whole dollar amount.)

Net Present Value

Answer 1

1)	Accounting rate of return = Annual net income/Initial investment = 5600/250000 =	2.24%
2)	Annual cash flow = Annual net income+Depreciation = 5600+(250000-25000)/10 =	$             28,100
	Payback period in years = Initial investment/Annual cash flow = 250000/28100 =	8.90	Years
3)	NPV = PV of cash inflows-Initital investment = 28100*PVIFA(8,10)+25000*PVIF(8,10)-250000 = 28100*6.71008+25000*0.46319-250000 =	$           -49,867
4)	NPV = PV of cash inflows-Initital investment = 28100*PVIFA(3,10)+25000*PVIF(3,10)-250000 = 28100*8.53020+25000*0.74409-250000 =	$               8,301