Maggie's Resorts was wondering how to use capital budgeting to decide if their $7,943,000 expansion of its number of bungalows is a good investment. Management for Maggie's Resorts developed the following estimates for the expansion: Maggie's Resorts Number of additional guests per day 540 Average number of days guests will stay 15 Useful life of the expansion in years 16 Average cash spent per day by guest $285 Average variable costs per day for each guest $95 Cost of the expansion $7,943,000 Discount rate 11% Maggie's Resorts uses straight-line depreciation and expects the expansion to have a residual value of $1,072,000 at the end of its 16 year life. (Round your answers to two decimal places when needed and use rounded answers for all future calculations). 1. Compute the average annual net cash flow from the expansion. Additional Guest per day X Average cash spent by each guest per day X Number of days guests will stay = Average Annual Cash Inflow X X = Additional Guest per day X Average variable cost by each guest per day X Number of days guests will stay = Average Annual Cash Outflow X X = Average Annual Cash Inflow - Average Annual Cash Outflow = Average annual net cash inflow - = 2. Compute the average annual operating income from expansion. Average Annual net cash inflow X Operating life of Expansion = Total net cash inflows during life of expansion X = Cost - Residual Value = Total depreciation during life of expansion - = Maggie's Resorts Total net cash inflows during operation life of expansion Less: Total depreciation during operating life of expansion Total operating income during operating life Divide by: expansions operating life in years Average annual operating income from expansion 3. Compute the payback for the expansion project. Amount Invested / Exprected annual net cash inflow = Payback / = 4. Calculate the ARR. (Amount Invested + Residual Value) / 2 = Average amount invested + / 2 = Average Annual Operating Income / Average Amount Invested = ARR (%) / = 5. Should this investment be considered?
Maggie's Resorts was wondering how to use capital budgeting to decide if their $7,943,000 expansion of its number of bungalows is a good investment. Management for Maggie's Resorts developed the following estimates for the expansion: Maggie's Resorts Number of additional guests per day 540 Average number of days guests will stay 15 Useful life of the expansion in years 16 Average cash spent per day by guest $285 Average variable costs per day for each guest $95 Cost of the expansion $7,943,000 Discount rate 11% Maggie's Resorts uses straight-line depreciation and expects the expansion to have a residual value of $1,072,000 at the end of its 16 year life. (Round your answers to two decimal places when needed and use rounded answers for all future calculations). 1. Compute the average annual net cash flow from the expansion. Additional Guest per day X Average cash spent by each guest per day X Number of days guests will stay = Average Annual Cash Inflow X X = Additional Guest per day X Average variable cost by each guest per day X Number of days guests will stay = Average Annual Cash Outflow X X = Average Annual Cash Inflow - Average Annual Cash Outflow = Average annual net cash inflow - = 2. Compute the average annual operating income from expansion. Average Annual net cash inflow X Operating life of Expansion = Total net cash inflows during life of expansion X = Cost - Residual Value = Total depreciation during life of expansion - = Maggie's Resorts Total net cash inflows during operation life of expansion Less: Total depreciation during operating life of expansion Total operating income during operating life Divide by: expansions operating life in years Average annual operating income from expansion 3. Compute the payback for the expansion project. Amount Invested / Exprected annual net cash inflow = Payback / = 4. Calculate the ARR. (Amount Invested + Residual Value) / 2 = Average amount invested + / 2 = Average Annual Operating Income / Average Amount Invested = ARR (%) / = 5. Should this investment be considered?
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Chapter19: Capital Investment
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Maggie's Resorts was wondering how to use capital budgeting to decide if their $7,943,000 expansion of its number of bungalows is a good investment. Management for Maggie's Resorts developed the following estimates for the expansion:
Maggie's Resorts
(Round your answers to two decimal places when needed and use rounded answers for all future calculations).
1. Compute the average annual netcash flow from the expansion.
2. Compute the average annual operating income from expansion.
Maggie's Resorts
3. Compute the payback for the expansion project.
4. Calculate the ARR.
5. Should this investment be considered?
Maggie's Resorts
Number of additional guests per day | 540 |
---|---|
Average number of days guests will stay | 15 |
Useful life of the expansion in years | 16 |
Average cash spent per day by guest | $285 |
Average variable costs per day for each guest | $95 |
Cost of the expansion | $7,943,000 |
Discount rate | 11% |
Maggie's Resorts uses straight-line depreciation and expects the expansion to have a residual value of $1,072,000 at the end of its 16 year life.
(Round your answers to two decimal places when needed and use rounded answers for all future calculations).
1. Compute the average annual net
Additional Guest per day | X | Average cash spent by each guest per day | X | Number of days guests will stay | = | Average Annual |
---|---|---|---|---|---|---|
X | X | = |
Additional Guest per day | X | X | Number of days guests will stay | = | Average Annual |
|
---|---|---|---|---|---|---|
X | X | = |
Average Annual Cash Inflow | - | Average Annual Cash Outflow | = | Average annual net cash inflow |
---|---|---|---|---|
- | = |
2. Compute the average annual operating income from expansion.
Average Annual net cash inflow | X | Operating life of Expansion | = | Total net cash inflows during life of expansion |
---|---|---|---|---|
X | = |
Cost | - | Residual Value | = | Total depreciation during life of expansion |
---|---|---|---|---|
- | = |
Maggie's Resorts
Total net cash inflows during operation life of expansion | |
---|---|
Less: Total depreciation during operating life of expansion | |
Total operating income during operating life | |
Divide by: expansions operating life in years | |
Average annual operating income from expansion |
3. Compute the payback for the expansion project.
Amount Invested | / | Exprected annual net cash inflow | = | Payback |
---|---|---|---|---|
/ | = |
4. Calculate the ARR.
(Amount Invested | + | Residual Value) | / | 2 | = | Average amount invested |
---|---|---|---|---|---|---|
+ | / | 2 | = |
Average Annual Operating Income | / | Average Amount Invested | = | ARR (%) |
---|---|---|---|---|
/ | = |
5. Should this investment be considered?
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Step 1: Introduction of capital budgeting
VIEWStep 2: Requirement 1 - Computation of average cash inflow, outflow, and annual net cash inflow
VIEWStep 3: Requirement 2 - Computation of the average annual operating income from expansion
VIEWStep 4: Requirement 3 - Computation of the the payback for the expansion project
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