Question
B. Sunshine Bed & Breakfast is considering a capital budgeting project that involves significant expansion of its room and kitchen facilities. The cash flow stream
B. Sunshine Bed & Breakfast is considering a capital budgeting project that involves significant expansion of its room and kitchen facilities. The cash flow stream expected from this capital budgeting project is below. 1. Compute the payback period. What are advantages and disadvantages of this approach to evaluating a capital budgeting project? 2. Compute the net present value of this capital budgeting project. Assume a required rate of return of 15%. 3. Should the project be accepted? Explain your answer. Sunshine Bed & Breakfast Room and Kitchen Expansion Year Cash Flows 0 -$500,000 1 $100,000 2 $150,000 3 $250,000 4 $300,000 C. You are considering the purchase of a small Youth Hostel in the ski country of Northern Idaho, USA. The initial cost of this purchase is $125,000. The after-tax cash flow from this investment is estimated to be $30,000 per year for the next 5 years. The opportunity cost of capital is 8%. Calculate the following. 1. The Payback Period should you buy the youth hostel if your required payback is less than 4 years? 2. The present value of the benefits (PVB) 3. The present value of the costs (PVC) 4. The net present value (NPV) should you buy the youth hostel based on NPV rules? 5. Profitability Index (PI) what does the profitability index mean in terms of buying the youth hostel? 6. Internal Rate of Return (IRR) (use interpolation) should you buy the youth hostel based on IRR rules?
Bernies Restaurants Capital Budgeting Projects |
| ||
Year | Project A Net Cash Flow | Project B Net Cash Flow | |
0 | -$ 90,000 | -$100,000 | |
1 | $ 40,000 | $ 30,000 | |
2 | $ 40,000 | $ 50,000 | |
3 | $ 40,000 | $ 25,000 | |
4 | $ 40,000 | $ 55,000 |
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started