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?

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter19: Capital Investment

Section: Chapter Questions

Problem 15E: Gina Ripley, president of Dearing Company, is considering the purchase of a computer-aided...

See similar textbooks

Related questions

Concept explainers

Question

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?

Expert Solution

Trending now

This is a popular solution!

Step by step

Solved in 5 steps with 7 images

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.