The SPENCER CAR SERVICE is considering the purchase of a luxury limo at a cost of $500,000.

The estimated life of the limo is 10 years with an estimated salvage value of $0.00. Straight-line depreciation will be used.

The income tax rate is 25% and the hurdle rate is 10%. Furthermore, it is estimated that the limo will earn before-tax annual cash income of $100,000.

Calculate:

1. Using payback (round your answer to the nearest whole number), how long will it take for SPENCER CAR SERVICE to get back its initial investment?

a. 3 years

b. 4 years

c. 5 years

d. 6 years

2. Using Accounting Rate of Return (round your answer 1 decimal place), SPENCER CAR SERVICE will earn what return?

a. 12.5%

b. 14.5%

c. 16.5%

d. 13.5%

3. Using Internal Rate of Return (round your answer to the nearest whole number), SPENCER CAR SERVICE will earn what return?

a. 10%

b. 11%

c. 12%

d. 13%

4. Using Net Present Value (NPV), SPENCER CAR SERVICE will generate a NPV equal to what amount?

a. $22,325

b. $21,325

c. $20,325

d. $23,325

5. Using INDEX OF PROFITABILITY (IP), SPENCER CAR SERVICE will generate an IP equal to what number (round your answer 2 decimal places)?

a. 1.01

b. 1.02

c. 1.03

d. 1.04

Answer rating: 100% (QA)

Solution 1 Annual Cash Flows Computation Annual Net Income 135360 Annual Depreciation 1440000130000 ... View the full answer