3 Estimate the annual net income and annual net cash flows from the proposed PMS project. Keep in mind that, you should use only incremental revenues and cost saving from the proposed project, not all forecasted sales revenue and labor cost. You should also include annual recurring costs from this project. The Jones' Hotels uses straight-line depreciation method for depreciating fixed assets, and no salvage value is expected from the disposition of the PMS at the end of its economic life of 10-years. Company's average tax rate is 21%. Use the following table to calculate annual net incomes and annual net cash flows from the proposed PMS project. Craig Jones, the owner of Jones' Hotels is considering to replace the property management system (PMS) used in his hotels. IT department has been in search for a while for a cost-effective and efficient PMS to increase sales revenue and reduce labor cost. Recently, they have recommended Craig Jones a new sytem, Ultra PMS. Craig and his management team must evaluate the feasibility of this project. Consistent with all previous technology investments, no salvage value is presumed from the disposition of the proposed PMS at the end of its economic life of 10 years. Below is a cost break down of the new PMS rollover accross the properties of the company if the company management decides tc invest in this project: The sales and reservation team predicts that annual room sales revenue can be increased by 6% (incremental revenue) if the Ultra PMS is acquired. They predict that labor cost in the sales and reservations (S\&R) office can be reduced by 3% each year (labor cost savings). Below is the most recent forecasts for room sales revenue and labor cost in the sales and reseravations office: Craig Jones consults with his finance manager and asks her recommendation for the financing options for this investment. Traditionally, such large scale technology investments are financed with a combined funds of internal equity and debt financing (bank loans), and the Jones' Hotel uses Weighted Average Cost of Capital (WACC) method to calculate the cost of capital. For the PMS project, Jones asked his finance manager to calculate and present the cost components to finance the new PMS investment. Below are the information that the finance team uses to calculate cost of debt, cost of equity and WACC. 2.1.Cc If equity is used to finance capital projects, Jones's Hotel uses internal equity. There are two common models to estimate cost of internal equity: 1. Dividend valuation model, and 2. Capital asset pricing model (CAPM). The following information is availabe for finance team to calculate cost of internal equity using both methods. For dividend valuation method: Jones' common stock is selling for $70 per share, pays a current dividend of $3 per share, and earnings and dividends are expected to grow at a 3.5% rate into the foreseeable future. For CAPM method: Jones' stock beta is at 1.2, the expected risk-free rate of return is 3.8%, and the expected market return is 7% 2.2.C Jones' Hotels works with a national bank for bank loans to finance technology investments. The most recent correspondance with the bank reveals that Jones' can use a long-term bank loan at 6.5% interest rate to finance the PMS investment. Jones' average tax rate is 21% 2.3.) 3. For the previous technology investments that were financed with a combination of equity and debt, Jones' Hotels used 35% equity financing and 65% debt financing. The finance team predicts that same proportion of equity and debt financing would be appropriate for the proposed PMS project. The finance team uses the larger of the cost of internal equity calculations (Dividend valuation model vs. CAPM) to be conservative on determining WACC. Jones' Hotels use traditional investment decision criteria to evaluate its projects. Below are the specific information for each criteria: Accounting rate of return. Jones' Hotels use the average annual net income from the project to compare it against the average investment cost. Jones' Hotels' threshold to accept a project is 24% accounting rate of return. 2 Payback period. The payback period threshold for tecnology projects is 4 years for Jones' Hotels. Discounted Payback period. The discounted payback period threshold for tecnology projects is 5 years for Jones' Hotels. Jones' Hotels uses the WACC rate to discount future cash flows to present. Net present value (NPV). Jones' Hotels uses the WACC rate to discount future cash flows to present. Profitability index (PI). Jones' Hotels considers projects with PI>1 acceptable. Internal rate of return (IRR). Jones' Hotels calculates the IRR of each project to evaluate whether a project is acceptable or not. Jones' Hotels requires a minimum IRR of 18% on this investment