1. The management of Cane Garden Resorts Inc. has decided to that with effect July 1, 2018, the hotel should be HACCAP certified. This move would require that the hotel replace its existing refrigeration equipment in the kitchen. Five years ago, Cane Garden Resorts Inc. purchased the existing refrigeration equipment at a cost of $250,000. The hotel uses a straight-line method to depreciate its refrigeration equipment with a ten-year expected life. Currently, the market value of old equipment is $120,000.

Cane Garden Resorts Inc. received a quotation from Evelyn Company for new refrigeration equipment at a purchase price of $500,000. The installation cost is an additional $30,000 and the electrical service would have to be upgraded in the kitchen to accommodate the new equipment. The cost of this upgrade is $20,000. The new refrigeration equipment is expected to last the hotel 10-years. Over its 10-year life, it will reduce operating costs by $80,000 per year for the first 6 years and by $70,000 per year for the remaining 4 years. The hotel will be required to invest working capital requirements by $25,000 at the beginning of the replacement and this will be recovered at the end of the project. It is estimated that the new refrigeration equipment machine can be sold at the end of its life for $100,000. The hotel uses a 12% cost of capital and has determined that an acceptable payback period is 5 years.

Required Using the net present value method determine whether the new refrigeration should be installed. [13 marks]

1. Barone Company is considering a capital investment of $80,000 in additional equipment. The new equipment is expected to have a useful life of 8 years with no salvage value. Depreciation is computed by the straight-line method. During the life of the investment, annual net income and cash inflows are expected to be $5,500 and $15,500, respectively. Barone requires a 10% return on all new investments.

Present Value of an Annuity of 1

Period 8% 9% 10% 11% 12% 15%

8 5.747 5.535 5.335 5.146 4.968 4.487

Compute each of the following:

1. Payback period. [2]

2. Net present value. [3]

3 Internal rate of return. [3]

4. Annual rate of return. [2]

5. Indicate whether the investment should be accepted or rejected. [2]