The health resort ‘Nice Beach’ on an island in the North Sea wants to enhance their service for the two million guests on one hand and to make the billing of the visitor’s tax more efficient on the other hand. Therefore, they intend to introduce a so-called guest card with the following functions:

– It serves as a ferry ticket from the mainland to the island.

– It serves as a visitor’s card and allows for use of the various offerings of the resort administration.

– It enables certain services like the reservation of a beach chair.

The card has to be designed so that all relevant payments can be made conveniently at a machine upon leaving the island. It is expected that already in the year of introduction, the annual cost of personnel in the resort administration can be reduced by € 181,000.

There is a choice between two systems: The initial capital expenditure for system A is € 1,000,000 and for system B € 1,500,000. We assume that both systems have the same quality.

The economic life is assumed to be 10 years in either case. No salvage values occur at the end of the useful life expectancy. The resort administration calculates for investment decisions with an interest rate of 6 %.

Additional costs occur as follows:

a) Assess the alternatives using the cost comparison method. Imputed interest is based on the average capital employed.

b) Using the profit comparison method, what would your decision advice be? Would your advice differ from part ‘a’?

c) Expand your calculation by taking into account the size of the initial investment. Perform an accounting rate of return comparison.

d) Finally, complete your reflections by applying the non-discounting payback method.

e) Which system would you advise to accept?

Transcribed Image Text:

Material price of the guest card System A 0.03 System B 0.0054 per guest Annual energy costs Annual maintenance 1,000 5,000 1,450 included in the initial outlay