Georgia Properties is considering purchasing a 50-room motel outside of Atlanta as an investment. The current owners

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Georgia Properties is considering purchasing a 50-room motel outside of Atlanta as an investment. The current owners state that the motel’s occupancy rate averages 80 percent each of the 300 days per year the motel is open. Each room rents for $ 70 per day, and variable cash operating costs are $ 20 per occupancy day. Fixed annual cash operating costs are $ 250,000. Savannah Roe, Georgia Properties’ owner, is considering paying $ 1,500,000 for the motel. Georgia Properties would keep the motel for 14 years and then dispose of it. Because the market for motels is difficult to predict, Roe estimates a zero salvage value at the time of disposal. Depreciation (rounded to the nearest dollar) will be taken on a straight-line basis for tax purposes. Roe’s tax rate is estimated at 25 percent for all years.

a. Determine the after-tax net present value of the motel to Georgia Properties, assuming a cost of capital rate of 10 percent.

b. What is the highest discount rate that will allow this project to be considered acceptable to Georgia Properties?

c. What is the minimum amount the net after-tax cash flows must be to allow the project to be considered acceptable by Georgia Properties, assuming a cost of capital rate of 10 percent?

d. What is the fewest number of years for which the net after-tax cash flows can be received and the project still be considered acceptable?


Net Present Value
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at...
Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...
Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...
Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal...
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Cost Accounting Foundations and Evolutions

ISBN: 978-1111971724

9th edition

Authors: Michael R. Kinney, Cecily A. Raiborn

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