Falcon Crest Aces (FCA), Inc., is considering the purchase of a small plane to use in its

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 .........$ 110,000

Useful life ............. 10 years

Salvage value ........... $ 10,000

Annual net income generated ..... $ 4,200

FCA’s cost of capital ........ 10%

Required:

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

1. Accounting rate of return.

2. Payback period.

3. Net present value (NPV).

4. Recalculate FCA’s NPV assuming the cost of capital is 6 percent.

5. Based on your calculations of NPV, what would you estimate the project’s internal rate of return to be?

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