Question
Brutte Luxury Resort has an opportunity of replacing the old computers with the new ones for the entire hotel. New computers will cost $270,200 to
Brutte Luxury Resort has an opportunity of replacing the old computers with the new ones for the entire hotel. New computers will cost $270,200 to the hotel with a shipping cost of $24,600 and it will cause Brutte to increase its net working capital by $17,500. The old computers can be sold for $120,000 in the market. But on the books, the value of the asset is $145,000.
This project is based on two year work and it is expected to increase sales revenue by $82,000 and to increase operating costs by $18,500. There is no expected change in net working capital after the project is undertaken and no estimated salvage value for the first year. The old system is fully depreciated and the new system will be depreciated straight-line to a zero value over the eight economic life of a project. The management of this hotel would like have a required rate of return of 11.00%. If the marginal corporate tax is 40.00%, and the second years NCF is $140,500, calculate the internal rate of return (IRR) of this project and determine whether Brutte should accept the project or not.
a) IRR is 3.08%. Accept the project
b) IRR is 3.08%. Reject the project
c) IRR is 3.67%. Reject the project
d)IRR is 3.67%. Accept the project
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