Dynasty Inn is considering adding a Business Center to its lobby area. Find belo
ID: 2493871 • Letter: D
Question
Dynasty Inn is considering adding a Business Center to its lobby area. Find below the data relating to this capital investment.
Business Center
Initial Cost
$ 60,000
Annual cash inflows
25,000
Annual cash outflows
8,000
Salvage value
6,000
Estimated useful life
10 years
Management’s hurdle rate for its investments is 10%. Cash flows for this project are expected to occur evenly throughout the asset’s life. Determine the following items:
(1)Cash Payback Period
(2) Net Present Value
(3) Should the hotel invest in the new project? Why or why not?
Dynasty Inn is considering adding a Business Center to its lobby area. Find below the data relating to this capital investment.
Business Center
Initial Cost
$ 60,000
Annual cash inflows
25,000
Annual cash outflows
8,000
Salvage value
6,000
Estimated useful life
10 years
Management’s hurdle rate for its investments is 10%. Cash flows for this project are expected to occur evenly throughout the asset’s life. Determine the following items:
(1)Cash Payback Period
(2) Net Present Value
(3) Should the hotel invest in the new project? Why or why not?
Explanation / Answer
Cash Payback period = Initial Investment/Net Annual Cash Inflow $ Initial Cost 60000 Annual Cash Inflow 25000 Annual Cash Outflow 8000 Net Annual Cash Inflow 17000 Cash Payback Period =60000/17000 3.53 years Net Presen Value Initial Cost -60000 Net Annual Cash Inflow 17000 PVAF @10% for 10 years 6.1446 Present Value of Net Cash Inflows 104458.2 Salvage value 6000 Discount Factor @10% for 10th year 0.3855 Present Value of Salvage Value 2313 NPV 46771.2 Hotel should Invest as the NPV is +ve
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