Q:

Balloons By Sunset (BBS) is considering the purchase of two new hot air balloons so that it can expand its desert sunset tours. Various information about the proposed investment follows:

Initial investment (for two hot air balloons)	$	364,000
Useful life		7	years
Salvage value	$	49,000
Annual net income generated	$	33,124
BBSs cost of capital		14	%

Assume straight line depreciation method is used.

Required:

Help BBS evaluate this project by calculating each of the following:

(Number 2 and 4's answers were already found and are listed below)

1.

Accounting rate of return. (Round your answer to 1 decimal place.)

Accounting Rate of Return

%

2.

Payback period. (Round your answer to 2 decimal places.)

Payback Period

4.66 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.)

Net present value

4. Recalculate the NPV assuming BBS's cost of capital is 15 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. Negative amount should be indicated by a minus sign.)

Net present value

-20551