You are a savvy asset manager and have determined an opportunity to grow revenuein one of the hotels in your portfolio by investing in a social media campaign. Theoperating cost associated with said campaign is $50,000 and you expect it will drivean incremental 1% occupancy for the foreseeable future. If the subject hotelencompasses 175-rooms and the projected average daily rate is $200 how much hasthe value of this asset increased if the capitalization rate for similar assets is 6.5%.(Use a 360 day year in your analysis.)

The net present value: The net present value is one of the more popularly used capital budgeting…

Answered: You are a savvy asset manager and have…

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 1PA: Your company is planning to purchase a new log splitter for is lawn and garden business. The new...

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Austins cell phone manufacturer wants to upgrade their product mix to encompass an exciting new feature on their cell phone. This would require a new high-tech machine. You are excited about his new project and are recommending the purchase to your board of directors. Here is the information you have compiled in order to complete this recommendation: According to the information, the project will last 10 years and require an initial investment of $800,000, depreciated with straight-line over the life of the project until the final value is zero. The firms tax rate is 30% and the required rate of return is 12%. You believe that the variable cost and sales volume may be as much as 10% higher or lower than the initial estimate. Your boss understands the risks but asks you to explain the alternatives in a brief memo to the board, Write a memo to the Board of Directors objectively weighing out the pros and cons of this project and make your recommendation(s).
Your company is planning to purchase a new log splitter for is lawn and garden business. The new splitter has an initial investment of $180,000. It is expected to generate $25,000 of annual cash flows, provide incremental cash revenues of $150,000, and incur incremental cash expenses of $100,000 annually. What is the payback period and accounting rate of return (ARR)?
Gina Ripley, president of Dearing Company, is considering the purchase of a computer-aided manufacturing system. The annual net cash benefits and savings associated with the system are described as follows: The system will cost 9,000,000 and last 10 years. The companys cost of capital is 12 percent. Required: 1. Calculate the payback period for the system. Assume that the company has a policy of only accepting projects with a payback of five years or less. Would the system be acquired? 2. Calculate the NPV and IRR for the project. Should the system be purchasedeven if it does not meet the payback criterion? 3. The project manager reviewed the projected cash flows and pointed out that two items had been missed. First, the system would have a salvage value, net of any tax effects, of 1,000,000 at the end of 10 years. Second, the increased quality and delivery performance would allow the company to increase its market share by 20 percent. This would produce an additional annual net benefit of 300,000. Recalculate the payback period, NPV, and IRR given this new information. (For the IRR computation, initially ignore salvage value.) Does the decision change? Suppose that the salvage value is only half what is projected. Does this make a difference in the outcome? Does salvage value have any real bearing on the companys decision?
Caduceus Company is considering the purchase of a new piece of factory equipment that will cost $565,000 and will generate $135,000 per year for 5 years. Calculate the IRR for this piece of equipment. For further instructions on internal rate of return In Excel, see Appendix C.
The Ham and Egg Restaurant is considering an investment in a new oven that has a cost of $60,000, with annual net cash flows of $9,950 for 8 years. The required rate of return is 6%. Compute the net present value of this investment to determine whether or not you would recommend that Ham and Egg invest in this oven.
Gardner Denver Company is considering the purchase of a new piece of factory equipment that will cost $420,000 and will generate $95,000 per year for 5 years. Calculate the IRR for this piece of equipment. For further Instructions on internal rate of return in Excel, see Appendix C.
Bouvier Restaurant is considering an investment in a grill that costs $140,000, and will produce annual net cash flows of $21,950 for 8 years. The required rate of return is 6%. Compute the net present value of this investment to determine whether Bouvier should invest in the grill.
An office building is currently for sale, and you are thinking of purchasing it. From your extensive market research and knowledge, you know the net operating income for this year is $315,000. You expect the net operating income will grow by 7% in the first five years, 5% in the subsequent five years, and 3.5% for every year after. If you are considering an 18-year investment window and desire a 16% rate of return, how much should you pay for the building?
Throughout the semester we have talked about the challenges facing office building owners in a post pandemic work environment where office workers are allowed to work remotely. You own a 500,00 square foot office building in a viable urban market, but you anticipate a stabilized vacancy rate of 40% for the next 10 years. If your investors require a 12% cash on cash return, how much could you spend per square foot to convert the vacant office space to micro-apartments if your project stabilized cash available to investors will be $12 million? Question 18 options: $200 per square foot. $800 per square foot. $250 per square foot. $500 per square foot.
You are the owner of a large data-services firm and are deciding on the purchase of a new hardwarecooling system that you expect will yield $233,300 in cost-savings per year for the next 15 years. Theinstallation of this cooling system will cost $3,000,000. Additionally, O&M expenditures for the collingsystem are expected to be $2,120 per year.1. At face value, does this system seem profitable? By how much?2. Assume that your company uses a discount rate of 6%.a. What is the Net Present Value (NPV) of this project?b. How does the NPV of this project change as you assume a higher or lower discountrate? Why?c. What is the IRR/ROI of this project?d. How much should the yearly cost-savings be in order to break even?i. (hint) use goal-seek/what-if analysis3. Suppose that you decide to finance the purchase of this system through a loan from the bank.The bank is willing to loan this money over an 8 year term at an interest rate of 4% per year.a. Using a 70/30 debt-to-equity ratio, what is…
You are considering constructing a luxuryapartment building project that requires an investment of $15,500,000, which comprises $12,000,000for the building and $3,500,000 for land. The building has 50 units. You expect the maintenance cost forthe apartment building to be $350,000 the first yearand $400,000 the second year, after which it will continue to increase by $50,000 in subsequent years. Thecost to hire a manager for the building is estimatedto be $85,000 per year. After five years of operation,the apartment building can be sold for $17,000,000.What is the annual rent per apartment unit that willprovide a return on investment of 15% after tax?Assume that the building will remain fully occupiedduring the five years. Assume also that your tax rateis 35%. The building will be depreciated accordingto 39-year MACRS and will be placed in service inJanuary during the first year of ownership and sold inDecember during the fifth year of ownership.
You are considering a luxury apartment building project that requires an investment of $12,500,000. The building has 50 units. You expect that the maintenance cost for the apartment building will be $250,000 in the first year, and to rise to $300,000 in the second year, and to continue to increase by $50,000 in subsequent years. The cost to hire a manager for the building is estimated to be $80,000 per year. After five years of operation, the apartment building can be sold for $14,000,000. What annual rent per apartment unit will provide a return on investment of 15%? Assume that the building will remain fully occupied during the five years.

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