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(Replacement chains) Destination Hotels currently owns an older hotel on the best beachfront property on Hilton Head Island, and it is considering either remodeling the hotel or tearing it down and building a new convention hotel, but because both hotels would occupy the same physical location, the company can only choose one project—that is, these are mutually exclusive projects. Both of these projects have the same initial outlay of $1 million. The first project, since it is a remodel of an existing hotel, has an expected life of 8 years and will provide
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- The city engineer and economic development directors are evaluating two sites for construction of a multipurpose sports arena. The sites are downtown (DT) and southwest (SW) of the metropolitan area. The city already owns enough land at the DT site; however, the land for a parking garage will cost $1 million, and construction costs will be $10 million for the parking garage, infrastructure relocation, and drainage. The SW site is 30 km from downtown, but the land will be donated by a developer who knows that an arena at this site will dramatically increase the value of the remainder of his land holdings. Because of its centralized location, there will be greater attendance at most of the events held at the DT site. This will result in more revenue to vendors and local merchants in the amount of $700,000 per year. Additionally, the average attendee will not have to travel as far, resulting in annual benefits of $400,000 per year. All other costs and revenues are expected to be the same…arrow_forwardManny Carson, certified management accountant and controller of Wakeman Enterprises, has been given permission to acquire a new computer and software for the companys accounting system. The capital investment analysis showed an NPV of 100,000. However, the initial estimates of acquisition and installation costs were made on the basis of tentative costs without any formal bids. Manny now has two formal bids, one that would allow the firm to meet or beat the original projected NPV and one that would reduce the projected NPV by 50,000. The second bid involves a system that would increase both the initial cost and the operating cost. Normally, Manny would take the first bid without hesitation. However, Todd Downing, the owner of the firm presenting the second bid, is a close friend. Manny called Todd and explained the situation, offering Todd an opportunity to alter his bid and win the job. Todd thanked Manny and then made a counteroffer. Todd: Listen, Manny, this job at the original price is the key to a successful year for me. The revenues will help me gain approval for the loan I need for renovation and expansion. If I dont get that loan, I see hard times ahead. The financial stats for loan approval are so marginal that reducing the bid price may blow my chances. Manny: Losing the bid altogether would be even worse, dont you think? Todd: True. However, if you award me the job, Ill be able to add personnel. I know that your son is looking for a job, and I can offer him a good salary and a promising future. Additionally, Ill be able to take you and your wife on that vacation to Hawaii that weve been talking about. Manny: Well, you have a point. My son is having an awful time finding a job, and he has a wife and three kids to support. My wife is tired of having them live with us. She and I could use a vacation. I doubt that the other bidder would make any fuss if we turned it down. Its offices are out of state, after all. Todd: Out of state? All the more reason to turn it down. Given the states economy, it seems almost criminal to take business outside. Those are the kind of business decisions that cause problems for people like your son. Required: Evaluate the ethical behavior of Manny. Should Manny have called Todd in the first place? Would there have been any problems if Todd had agreed to meet the lower bid price? Identify the parts of the Statement of Ethical Professional Practice (Chapter 1) that Manny may be violating, if any.arrow_forwardFriedman Company is considering installing a new IT system. The cost of the new system is estimated to be 2,250,000, but it would produce after-tax savings of 450,000 per year in labor costs. The estimated life of the new system is 10 years, with no salvage value expected. Intrigued by the possibility of saving 450,000 per year and having a more reliable information system, the president of Friedman has asked for an analysis of the projects economic viability. All capital projects are required to earn at least the firms cost of capital, which is 12 percent. Required: 1. Calculate the projects internal rate of return. Should the company acquire the new IT system? 2. Suppose that savings are less than claimed. Calculate the minimum annual cash savings that must be realized for the project to earn a rate equal to the firms cost of capital. Comment on the safety margin that exists, if any. 3. Suppose that the life of the IT system is overestimated by two years. Repeat Requirements 1 and 2 under this assumption. Comment on the usefulness of this information.arrow_forward
- An electric utility is considering a new power plant in northern Arizona. Power from the plant would be sold in the Phoenix area, where it is badly needed. Because the firm has received a permit, the plant would be legal; but it would cause some air pollution. The company could spend an additional $40 million at Year 0 to mitigate the environmental problem, but it would not be required to do so. The plant without mitigation would require an initial outlay of $269.75 million, and the expected cash inflows would be $90 million per year for 5 years. If the firm does invest in mitigation, the annual inflows would be $93.85 million. Unemployment in the area where the plant would be built is high, and the plant would provide about 350 good jobs. The risk adjusted WACC is 17%. Calculate the NPV and IRR with mitigation. Enter your answer for NPV in millions. For example, an answer of $10,550,000 should be entered as 10.55. Negative values, if any, should be indicated by a minus sign. Do not…arrow_forwardAn electric utility is considering a new power plant in northern Arizona. Power from the plant would be sold in the Phoenix area, where it is badly needed. Because the firm has received a permit, the plant would be legal; but it would cause some air pollution. The company could spend an additional $40 million at Year 0 to mitigate the environmental problem, but it would not be required to do so. The plant without mitigation would require an initial outlay of $269.87 million, and the expected cash inflows would be $90 million per year for 5 years. If the firm does invest in mitigation, the annual inflows would be $93.62 million. Unemployment in the area where the plant would be built is high, and the plant would provide about 350 good jobs. The risk adjusted WACC is 16%. Calculate the NPV and IRR with mitigation. Enter your answer for NPV in millions. For example, an answer of $10,550,000 should be entered as 10.55. Negative values, if any, should be indicated by a minus sign. Do not…arrow_forwardEntertainment Engineers, Inc., is an Ohio-based design engineering firm that designs rides for amusement and theme parks all over the world. Two alternative designs are under consideration for a new ride called the Scream Machine at a theme park located in Florida. The two candidate designs differ in complexity, cost, and predicted revenue. The first alternative design (A) will require an investment of $300,000 and is estimated to produce after-tax revenue of $55,000 annually over a 10-year planning horizon. The second alternative design (B) will require an investment of $450,000 and is expected to generate annual after-tax revenue of $80,000. A negligible salvage value is assumed for both designs. Theme park management could decide to “do nothing”; if so, the present worth of doing nothing will be zero. An after-tax MARR of 10% is used.Which alternative design, if either, should the theme park select?arrow_forward
- Brubaker Inc., a manufacturer of high-sugar, low-sodium, low-cholesterol TV dinners, would like to increase its market share in the Sunbelt. In order to do so, Brubaker has decided to locate a new factory in the Panama City area. Brubaker will either buy or lease a site depending upon which is more advantageous. The site location committee has narrowed down the available sites to the following three buildings. Building A: Purchase for a cash price of $610,000, useful life 25 years. Building B: Lease for 25 years with annual lease payments of $70,000 being made at the beginning of the year. Building C: Purchase for $650,000 cash. This building is larger than needed; however, the excess space can be sublet for 25 years at a net annual rental of $6,000. Rental payments will be received at the end of each year. The Brubaker Inc. has no aversion to being a landlord. In which building would you recommend that Brubaker Inc. locate, assuming a 12% cost of funds? (Show work please)arrow_forwardThe Fleming Company, a food distributor, is considering replacing a filling line at its Oklahoma City warehouse. The existing line was purchased several years ago for $3,600,000. The line’s book value is $445,000, and Fleming's management feels it could be sold at this time for $350,000. A new, increased capacity line can be purchased for $2,575,000 and will require and increase in NWC of $55,000. Delivery and installation of the new line are expected to cost $50,000 and 215,000 respectively. Assuming Fleming’s marginal tax rate is 35%, calculate the net investment for the new line.arrow_forwardSuisan Fish Company must decide whether to build a small or a large warehouse at a new location, Kona. Demand at Kona can be either low or high, with probabilities estimated to be 0.4 and 0.6, respectively. If a small warehouse is built, and demand is high, the fish manager may choose to maintain the current size or to expand. The net present value of profits is $220,000 if the company chooses not to expand. However, if the firm chooses to expand, there is a 50% chance that the net present value of the returns will be $330,000 and a 50% chance the estimated net present value of profits will be $220,000. If a small warehouse is built and demand is low, there is no reason to expand and the net present value of the profits is $210,000. However, if a large warehouse is built and the demand turns out to be low, the choice is to do nothing with a net present value of $25,000 or to stimulate demand through local advertising. The response to advertising can be either modest with a probability…arrow_forward
- An electric utility is considering a new power plant in northern Arizona. Power from the plant would be sold in the Phoenix area, where it is badly needed. Because the firm has received a permit, the plant would be legal, but it would cause some air pollution. The company could spend an additional $40 million at Year 0 to mitigate the environmental problem, but it would not be required to do so. The plant without mitigation would cost $240 million, and the expected cash inflows would be $80 million per year for 5 years. If the firm does invest in mitigation, the annual inflows would be $84 million. Unemployment in the area where the plant would be built is high, and the plant would provide about 350 good jobs. The risk-adjusted WACC is 17%. a. Calculate the NPV and IRR with and without mitigation. b. How should the environmental effects be dealt with when evaluating this project? c. Should this project be undertaken? If so, should the firm do the mitigation? Why or why not?arrow_forwardIn a small seaside community called Reform Village, a huge company is proposing to enterone of two projects. Project A is to build a five-storey hotel on the pristine beachfront ofReform Village. Project B is to build twenty self- contained log cabins along the beach withan additional two cabins for a restaurant and health spa.Each project requires an initial investment of $2 000 000 and has no salvage value. Theinvesting company estimates the cost of capital to be 10%. The company must choose eitherproject A or Project B. The following cash flows are projected for Project A and Project Bover five yearsYear Project A Project B2000 $600 000 02001 600 000 400 0002002 600 000 400 0002003 600 000 1 000 0002004 600 000 1 800 000Additional InformationThe citizens of Reform Village are divided over which project will benefit the…arrow_forwardBuffalo Inc. is considering whether to lease or purchase a piece of equipment. The total cost to lease the equipment will be $137,000 over its estimated life, while the total cost to buy the equipment will be $83,000 over its estimated life. At Buffalo’s required rate of return (hurdle rate), the net present value of the cost of leasing the equipment is $78,300 and the net present value of the cost of buying the equipment is $72,000. Based on financial factors, Buffalo should: Multiple Choice buy the equipment, saving $6,300 over leasing. lease the equipment, saving $6,300 over buying. lease the equipment, saving $54,000 over buying. buy the equipment, saving $54,000 over leasing.arrow_forward
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