Question
Lindas Luxury Travel (LLT) is considering the purchase of two Hummer limousines. Various information about the proposed investment follows: Initial investment (2 limos) $ 660,000
Lindas Luxury Travel (LLT) is considering the purchase of two Hummer limousines. Various information about the proposed investment follows:
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|
|
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Initial investment (2 limos) | $ | 660,000 | |
Useful life |
| 10 | years |
Salvage value | $ | 200,000 |
|
Annual net income generated |
| 53,460 |
|
LLTs cost of capital |
| 13 | % |
Assume straight line depreciation method is used. Required: Help LLT evaluate this project by calculating each of the following: 1. Accounting rate of return. (Round your percentage answer to 1 decimal place.)
2. Payback period. (Round your answer to 2 decimal places.) 3. 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. Do not round intermediate calculations. Cash Outflows and negative amounts should be indicated by a minus sign. Round your "Present Values" to the nearest whole dollar amount.)
Table or calculation function:
Cash Outflow (the 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:
4. Without making any calculations, determine whether the IRR is more or less than 13%.
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