LONG-TERM CAPITAL INVESTMENT A draft proposal has been prepared by the Exeter hotel manager to expand and upgrade the existing kitchen facilities, in order to increase both its serving capacity and food offerings to include cooked meals at breakfast and evenings. An alternative proposal is to close the restaurant and transform the space into a facility for meetings and conferences. If there is investment in the expansion and upgrade, the additional cash costs and revenues are estimated to be as follows: Year 0 1 2 3 4 Investment Cash flows (200,000) Revenue Cash Flows Cost Cash Flows (55%) Net Cash Flows 130,000 140,000 150,000 160,000 70,000 75,000 80,000 90,000 60,000 65,000 70,000 70,000 (200,000) Additional Meals 6,500 7,000 7,500 8,000 All Buenos Dias projects have a cost of capital requirement of 11% and are evaluated on a 4-year basis. The internal return of the project has been calculated as approximately 12%. Financing of proposals under 250,000 are the responsibility of individual hotels. Requirement: Section A of your report - to the Exeter hotel manager Make a recommendation on proceeding with the proposal, highlighting any points to support your advice, or are recommended for query / further consideration before a final decision. 25 Marks Discount Rates and Factors: 0 1 2 3 4 10% 1.000 0.909 0.826 0.751 0.683 11% 1.000 0.901 0.812 0.731 0.659 1.000 0.893 0.797 0.712 0.636 12% 13% 1.000 0.885 0.783 0.693 0.613 14% 1.000 0.877 0.769 0.675 0.592 15% 1.000 0.870 0.756 0.658 0.572