Balloons By Sunset BBS is considering the purchase of two
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) $ 420,000
Useful life .............. 10 years
Salvage value ............ $ 50,000
Annual net income generated ...... $ 37,800
BBS’s cost of capital ......... 11%

Help BBS evaluate this project by calculating each of the following:
1. Accounting rate of return.
2. Payback period.
3. Net present value (NPV).
4. Recalculate the NPV assuming BBS’s cost of capital is 15 percent.
5. Based on your calculation of NPV, what would you estimate the project’s internal rate of return to be?

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