The Rosio Hotel Corporation is considering replacing its old hot tub with a new one at a cost of $27,000. With the new hot tub, the company expects to save $5,000 in maintenance costs per year, all cash savings. These savings in maintenance costs represent both an increase in cash flow and an increase in incremental operating income. The new hot tub has an estimated useful life of 9 years with no residual value. The company's required rate of return is 14%. The old hot tub has no residual value. Do not enter dollar signs or commas in the input boxes. Use the present value tables found in the textbook appendix. Use the negative sign for negative values. Round all answers to 2 decimal places. a) Assume the company wants to recover their initial investment on the new hot tub in nine years. Based on the payback method, should the hotel purchase the new hot tub? Cash Payback Period: 5.4 years Should the hotel purchase the new hot tub?: Yes b) If the ARR method is used, should Rosio Hotel purchase the new hot tub? ARR: 18.52 × % Should the hotel purchase the new hot tub?: Yes c) If the NPV technique was used, should Rosio Hotel purchase the new hot tub? Round your answer to the nearest whole number. NPV: $8695 Should the hotel purchase the new hot tub?: No ✰
The Rosio Hotel Corporation is considering replacing its old hot tub with a new one at a cost of $27,000. With the new hot tub, the company expects to save $5,000 in maintenance costs per year, all cash savings. These savings in maintenance costs represent both an increase in cash flow and an increase in incremental operating income. The new hot tub has an estimated useful life of 9 years with no residual value. The company's required rate of return is 14%. The old hot tub has no residual value. Do not enter dollar signs or commas in the input boxes. Use the present value tables found in the textbook appendix. Use the negative sign for negative values. Round all answers to 2 decimal places. a) Assume the company wants to recover their initial investment on the new hot tub in nine years. Based on the payback method, should the hotel purchase the new hot tub? Cash Payback Period: 5.4 years Should the hotel purchase the new hot tub?: Yes b) If the ARR method is used, should Rosio Hotel purchase the new hot tub? ARR: 18.52 × % Should the hotel purchase the new hot tub?: Yes c) If the NPV technique was used, should Rosio Hotel purchase the new hot tub? Round your answer to the nearest whole number. NPV: $8695 Should the hotel purchase the new hot tub?: No ✰
Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Don R. Hansen, Maryanne M. Mowen
Chapter19: Capital Investment
Section: Chapter Questions
Problem 10E: Roberts Company is considering an investment in equipment that is capable of producing more...
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Transcribed Image Text:The Rosio Hotel Corporation is considering replacing its old hot tub with a new one at a cost of $27,000. With the new hot tub, the company expects to save
$5,000 in maintenance costs per year, all cash savings. These savings in maintenance costs represent both an increase in cash flow and an increase in
incremental operating income. The new hot tub has an estimated useful life of 9 years with no residual value. The company's required rate of return is 14%.
The old hot tub has no residual value.
Do not enter dollar signs or commas in the input boxes.
Use the present value tables found in the textbook appendix.
Use the negative sign for negative values.
Round all answers to 2 decimal places.
a) Assume the company wants to recover their initial investment on the new hot tub in nine years. Based on the payback method, should the hotel purchase
the new hot tub?
Cash Payback Period: 5.4
years
Should the hotel purchase the new hot tub?: Yes
b) If the ARR method is used, should Rosio Hotel purchase the new hot tub?
ARR: 18.52
× %
Should the hotel purchase the new hot tub?: Yes
c) If the NPV technique was used, should Rosio Hotel purchase the new hot tub?
Round your answer to the nearest whole number.
NPV: $8695
Should the hotel purchase the new hot tub?: No ✰
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