Anika Paar, the owner of a nine-hole golf course on the outskirts of Hamilton, Ontario, is considering
Question:
Anika Paar, the owner of a nine-hole golf course on the outskirts of Hamilton, Ontario, is considering the proposal that the course be illuminated and operated at night. Ms. Paar purchased the course early last year for $90,000. Her receipts from operations during the 28-week season were $24,000. Total disbursements for the year, for all purposes, were $16,500.
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The required investment in lighting this course is estimated at $20,000. The system will require 150 lamps of 1,000 watts each. Electricity costs $0.032 per kilowatt-hour. The expected average hours of operation per night are five. Because of occasional bad weather and the probable curtailment of night operation at the beginning and end of the season, it is estimated that there will be only 130 nights of operation per year. Labour for keeping the course open at night will cost $15 per night. Lamp replacements are estimated at $300 per year; other maintenance and repairs, per year, will amount to 4 percent of the initial cost of the lighting system. Property taxes on this equipment will be about 2 percent of its initial cost. It is estimated that the average revenue, per night of operation, will be $90 for the first two years.
Considering the probability of competition from the illumination of other golf courses, Ms. Paar decides that she will not make the investment unless she can make at least 10 percent per annum on her investment. Because of anticipated competition, revenue is expected to drop to $60 per night for years 3 through 5. It is estimated that the lighting equipment will have a salvage value of $7,000 at the end of the five-year period.
Using discounted-cash-flow techniques, determine whether Ms. Paar should install the lighting system.
Salvage ValueSalvage 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...
Step by Step Answer:
Management Accounting
ISBN: 978-0132570848
6th Canadian edition
Authors: Charles T. Horngren, Gary L. Sundem, William O. Stratton, Phillip Beaulieu