solution manual for accounting

5/25/2018 Solution Manual for Accounting

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Chapter 27 - Longer-Run Decisions: Capital Budgeting

CHAPTER 27

LONGER-RUN DECISIONS: CAPITAL BUDGETING

Changes from Twelfth Edition

All changes to chapter 27 were minor.

Approach

Capital investment decisions are a special kind o alternative choice pro!lem. "he# are anal#$ed in thesame wa# as that used or the pro!lems descri!ed in Chapter 2%& with the e'ception that the timing ocash inlows and outlows must !e taken into account. "his one dierence is an important one& however.(n order to incorporate its eect in the anal#sis& one must have a thorough understanding o the concept opresent value. Because o the diicult# that students seem to have with the topic& the discussion o presentvalue in the irst part o this chapter proceeds )uite slowl# unless the Appendi' to Chapter * waspreviousl# assigned and discussed. +nce students understand the nature and use o this concept& the#should have relativel# little diicult# with most other topics discussed in the chapter.

,uite earl# in the chapter& the steps in anal#$ing a capital investment pro!lem are set orth. As various

aspects o the anal#sis are discussed& it is a good idea to relate each o them to these steps& and to keep thestudents continuall# aware o the purpose o the anal#sis& namel#& to reach a decision on the accepta!ilit#o a proposed capital investment.

"he reason or the omission o depreciation is oten diicult to understand. tudents must appreciate thatthe procedure takes into account the recover# o the investment& and that to include depreciation as aseparate item o cost would !e dou!le counting. (n addition to the te't discussion o this point& it ma# !edesira!le to introduce additional illustrations. (t ma# also !e desira!le to relate this topic to thecorresponding discussion in Chapter 2%.

tudents have diicult# in understanding the depreciation ta' shield. "he# learned in Chapter 2% thatnoncash costs are to !e disregarded& !ut now the# are told that noncash depreciation is to !e counted& andthis seems contradictor# "his point needs to !e discussed in depth tudents should understand that the


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this seems contradictor# "his point needs to !e discussed in depth tudents should understand that the


Phuket Beach Hotel: Valuing Mutually Exclui!e Capital Pro"ect asks students to !uild cash loworecasts and then to rank mutuall# e'clusive pro0ects using various evaluation criteria.

Problems

Problem 27-1

Land Donated Land Sold

Calculation o 3et (ncome:

4reta' income !eore disposal.....................................................................................................................................................56&666&666 56&666&666Addition to /deduction rom1 ta'a!le income.............................................................................................................................. /6&6661 6&6664reta' income ater disposal........................................................................................................................................................ &*6&666 6&6&666(ncome ta' 8 .96........................................................................................................................................................................5 &;%&666 5 9&699&666

Accounting income !eore disposal.............................................................................................................................................6&666&666 6&666&666Less !ook value o land............................................................................................................................................................... 6&6664lus gain on sale o land.............................................................................................................................................................. < 66&6664reta' accounting income............................................................................................................................................................ &6&666 6&66&666Less income ta' /a!ove1.............................................................................................................................................................. &;%&666 9&699&6663et (ncome..................................................................................................................................................................................5 %&69&666 5 %&6;%&666

Calculation o cash lowaving in ta' .96 ' 56&666......................................................................................................................................................5 99&666Cash rom sale.............................................................................................................................................................................5 6&666Less additional ta'....................................................................................................................................................................... < **&666Additional cash............................................................................................................................................................................5 99&666 5 22&666

trangel# enough& the compan# is !etter o to donate the land rather than to sell it.

3otes:


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!.

#ear1 2 $ % & Total

traight-line /a1...........................................................................................................................................................5%&666 5%&666 5%&666 5%&666 5%&666 56&666?ACR......................................................................................................................................................................%&666 &%66 ;&966 9&;66 9&;66 6&666Dierence in ta'a!le income...................................................................................................................................... 6 - &%66 @ %66 @&;66 @&;66 6Dierence in ta' 8 .96............................................................................................................................................... 6 - &996 @ 296 @ %66 @ %66 6Dierence in ater-ta' income.................................................................................................................................... 6 - 2&%6 @ %6 @ 66 @ 66 6Dierence in cumulative cash

low /ta' postponed1............................................................................................................................................... 6 &996 &266 %66 6

c. "he ?ACR method produces aster cash lows !ecause o the ta' advantage in earl# #ears whichdecreases the unds spent or ta'es.

/1 56&666; #ears& or 5%&666 per #ear

/21 56&666 ' ?ACR allowance or given #ear.

Problem 27-$ Corrine Compan"

a. LL +R R3"

( sell

Cost.............................................................................................................................................................................5276&666Accumulated depreciation...........................................................................................................................................*6&666 /5276&666; #ears1 ' 6 #earsBook value................................................................................................................................................................... 6&666

elling price.................................................................................................................................................................22;&666Long-term gain............................................................................................................................................................;&666"a' 8 .6.................................................................................................................................................................... 96&;663et gain ater ta'.......................................................................................................................................................... 9&;66


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Problem 27-%

a. "he investmentinlow ratio = 56&666 annual cash inlow = %.2& so i the investment is 56&666& the

annual cash inlow is 56&666 %.2& or 5&%.

c. An investmentinlow ratio o %.2& or 2 #ears& rom "a!le B is appro'imatel# a 2 internal rate oreturn.

!. "he investmentinlow ratio = investment 52&666 = %.9& so the investment = 52&2*6 /52&666 '

%.91.

c. "he investmentinlow ratio rom "a!le B or 7 #ears& at % is 9.6. "he investment is thereore5;&666 annual cash inlow ' 9.6 = 526&;& the ma'imum price to pa#.

d. "he investmentinlow ratio or * #ears& at 9& rom "a!le B& is 59&%& which is the ma'imuminvestment per dollar o annual savings.

Problem 27-& 'ellington Corporation

Calculation o 4ro0ect Returns

Pro(ect )sef*l Life

+n,estment

+nflow .a/ !et*rn .b/ !an0

% #ears 9.6 st2 9 . * rd ; *.6 2nd9 2 2.6 6 9th; 9 6 ti ;th


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!.

1445 1441 1442ales.................................................................................................................................................................................5&666 5&%66 5*66?aterial& la!or& direct overhead........................................................................................................................................ 966 7;6 ;6Added rent /2&;66 ' 591.................................................................................................................................................. ;6 ;6 ;6Depreciation..................................................................................................................................................................... 9;6 66 ;6Dierential cost................................................................................................................................................................ 66 &66 ;;6Dierential income........................................................................................................................................................... 66 ;66 2;6Dierential income ta'es /961....................................................................................................................................... 96 266 66Dierential net income..................................................................................................................................................... %6 66 ;6

Add !ack depreciation...................................................................................................................................................... 9;6 66 ;6Dierential cash low rom product.................................................................................................................................. ;6 %66 66alvage value.................................................................................................................................................................... -- -- *63et dierential cash low.................................................................................................................................................5 ;6 5 %66 59*6

Cash outla# or pro0ect:

4urchase price................................................................................................................5 66?odiications................................................................................................................. 6(nstallation...................................................................................................................... %6

"esting............................................................................................................................ 6"otal...............................................................................................................................5&6*6Less: alvage *6Deprecia!le Base 5 66

c. "he pa#!ack period is slightl# less than two #ears& since the initial investment is 5&6*6&666 and thesum o the irst two #ears inlows is 5&6&666. "hus& i a two-#ear pa#!ack period is the decisioncriterion& the pro0ect is accepta!le.

d. 6 3et income...........................................................................................................................5 &;66 3et income............................................................................................................................22&;662 3et income............................................................................................................................6%&;66

5;2 ;66


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. ( the student does not have access to a calculator or computer programmed to make (RR calculations&

the (RR must !e estimated using a trial-and-error approach. "he (RR is slightl# in e'cess o 22& asshown !# these calculations:

#ear Cash low 226 actor 226 P898 2%6 actor 2%6 P898

6: 5;6&666 6.*26 5 9*&266 6.*6% 5 9&6%6: %66&666 6.%72 96&266 6.%;6 6&6662: 9*6&666 6.;; 2%9&9*6 6.;29 2;&;26

5&6*;&**6 5&6;2&;*6

E"he initial investment /5&6*6&6661 is sometimes used in this calculation this would make the accounting rate o return =.

Cases

:ote on )se of Cases

"he same general line o attack can !e used or several o the cases: /1 make a )uantitative calculation/21 consider the non)uantitative actors and /1 reach a decision. (deall#& we think hal the time should !e

spent on the irst point and hal the time on the last two& !ut it never seems to work out that wa#. (nstead&the pro!lem is to get through the igures rapidl# enough so that one has an# time let to discuss thenon)uantitative matters and the decision. (n order to do this& we oten cut o the discussion o speciicpro!lems in the igures !# some such device as taking a vote& using the igure o the person who seems to!e making the !est argument& or even using our own igure. "his must !e done careull# and withappropriate cautions to the eect that we are not passing over the igures lightl#& !ut simpl# that we arenot taking the time to consider all the aspects o the igures so that we can have some time to discuss theaction.

(t is unortunate i the decision part o the pro!lem is omitted. ( this is done. students ma# get theimpression that the decision is o little importance& whereas actuall#& o course& it is crucial.

"here are several valid wa#s in which the igures ma# !e put together. "here are also several wa#s o


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Also& ( preer to get right to the pro!lems& rather than spending ver# much time on the te't. ( do go overthe idea o present value and answer some )uestions& !ut ( think trou!lesome points are !est handled inthe conte't o speciic pro!lems.

(n introducing 4art A& ( ma# ask: G( #ou were going to !u# a machine and had #our choice o pa#ing 5;now& or 5 a #ear or the ne't ive #ears& which would #ou takeHI 3e't G( #ou had #our choice o pa#ing5; now or 5 per #ear or si' #earsHI G>or seven #earsHI "his seems to help in clearing up the idea ocontrasting the one-shot cost with the stream o earnings and the notion o the present value o a stream opa#ments.

Comments on ;*estions

PA!T A

. (nvestment...............................................................................................................................................................52;6&666Annual savings........................................................................................................................................................72&6664resent value o 5 a #ear& ; #ears& ; percent.........................................................................................................;2"otal present value o savings..................................................................................................................................29&99Decision: 3et present value = -5*&%;% thereore.....................................................................................................Do not purchase

2. ame as )uestion .

Moral: Book value makes no dierence. "he igures and decision are the same as in . 3evertheless& aproit center manager ma# not view the 5;&666 write-o as irrelevant& even though it does represent asunk cost.

. (nvestment& gross.....................................................................................................................................................52;6&666Less salvage on old..............................................................................................................................................7;&666

3et investment..................................................................................................................................................7;&666Annual earnings.......................................................................................................................................................72&666

4resent value: 572&666 E .;2................................................................................................................................29&99Decision: 3et present value = 5%%&99 thereore....................................................................................................4urchase

Moral: "he resale value o the superseded machine reduces the amount o new unds re)uired which /in


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PA!T . (nvestment............................................................................................................................................................................5;66&666Annual earnings...................................................................................................................................................................%6&6664resent value: 5%6&666 E .;2...........................................................................................................................................;%&26Decision: 3et present value = 5%&26 thereore................................................................................................................4urchase/( ?odel A has resale value& the return would !e even higher.1

2. "he error arose when ?odel A was purchased. Assuming the situation in A/1& ?odel A has anaccepta!le return i its economic lie is ; #ears. (t turns out that its economic lie was onl# two #earsconse)uentl#& ?odel A should not have !een !ought /although this is known onl# rom hindsight1.

Moral: Dont let past mistakes prevent #ou rom making wise decisions now /i.e.& sunk costs areirrelevant1.

PA!T C

"he * "a' Act /and su!se)uent acts1 with ACR provisions usuall# makes this kind o acomputational nightmare or students& !ecause o the erratic GdepreciationI /oiciall#& Gcost recover#I1amounts in #ears -;& and the a!sence o such amounts in later #ears.

Fe have assumed that the ACR allowances sta# at ;& 2%& ;& 2& 2 or ;-#ear assets. "hecash low pattern& including a ; /assumed to !e time $ero1 ("C& is:

4J o cash savings o 5%6&666#ear or ; #ears = 5%6&666 E .%6 E ..........................................................................5*&2*Add: 4J o ACR depreciation ta' shield or 5;66&666 machine = 597&76 E .96............................................................%7&**

;;6&;%Deduct: 4J o depreciation shield rom old machine sacriiced/5;6&666#r. or more #ears1 = 5;6&666 E .96 E 2.;77 /"a!le B1....................................................................................... ;&;96

3et present value o earnings................................................................................................................................................59*&7%ince 59*&7% is more than the net investment o 59&666& the decision is to purchase.

ACR Allowance 4J actor ratio


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Decision: Do not purchase& since 34J = - 5&;;.

E"his is the dierence !etween .;2 and 2.2*

2. Although the total earnings or the ;-#ear period are the same in 4art D as in A/1& shiting moreo the earnings to the earl# #ears and less to the later #ears increases the present value rom529&99 to 529%&99.

Moral: "he time pattern o earnings makes a dierence.

. (nvestment& net o ("C..............................................................................................................................................527&;664resent value o cash savings:

Kears -: 57&;66 E .%6 / - ta' rate1 E 2.;77....................................................................................................522&2Kears 9-;: 5%6&7;6 E .%6 E l.9%......................................................................................................................... ;&%

4resent value o ACR depredation ta' shield:526*&*; E .96.................................................................................................................................................... *&;9

"otal present value...................................................................................................................................................52;*&6E. /; #rs.1 M 2.;77 / #rs.1

Moral: "he com!ination o ta'-shield !eneits and a shit in earnings now makes the decision to purchasea good one /even without the 52&;66 ("C1.

Case 27-2: Rock Creek Golf Club*

:ote#hi cae i unchange$ from the #%elfth E$ition.

Approach

Fhereas man# capital !udgeting pro!lems deal with comparative evaluation o alternative assetac)uisitions& this case involves anal#$ing two wa#s o inancing a given asset ac)uisition. ince Glease-

versus-!u#I is a common alternative choice pro!lem in !oth !usiness and non!usiness organi$ations& thiscase provides relevant e'perience or students. "he class session can deal se)uentiall# with the assigned)uestions. ,uestion is the most diicult and su!0ect to students omissions and diering assumptions.,uestion 9 is interesting& !ut not crucial should class time !ecome scarce.


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E*tflow >*tflow +nflow

6 EDisposal o old carts.......................................................................................................................................................*&666 *&6666 E"a' eect o disposal....................................................................................................................................................2&726 2&7266 4urchase cost....................................................................................................................................................................*&%66 n.a.

-; ECart revenues2................................................................................................................................................................;;&996 ;;&996-; ECart e'penses................................................................................................................................................................&6**#r. &6**#r.-; Lease pa#ments9............................................................................................................................................................... n.a. &266#r Depreciation ta' shields;..................................................................................................................................................&;26 n.a.2 Depreciation ta' shield.....................................................................................................................................................7&672 n.a. Depreciation ta' shield.....................................................................................................................................................9&29 n.a.9 Depreciation ta' shield.....................................................................................................................................................&*2 n.a.; Depreciation ta' shield.....................................................................................................................................................&*2 n.a.; 4roceeds rom disposal....................................................................................................................................................&%66 n.a.

6 "ime Pero low................................................................................................................................................................*9&26 ;&2*6-; 34J o net streams..........................................................................................................................................................99&;2E &;2E

. = 77&6* .= 29&6

>actor 34J.................................................................................................................................................................................6.2% *&*% n.a.2 +.....................................................................................................................................................................................6.*;7 %&6% n.a. Depreciation.....................................................................................................................................................................6.79 &% n.a.9 "a'...................................................................................................................................................................................6.7; 2& n.a.; hield...............................................................................................................................................................................6.%* 2&%7 n.a.; 34J o disposal proceeds................................................................................................................................................6.%* %&;* n.a.

34J o ach Alternative................................................................................................................................................................522&6%* 52&%7634J Qsing ;.2* Discount Rate...................................................................................................................................................57&7;; 5&9

:>TES T> E


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;. #ear Depreciation Ta3 Shield .$%6/ 52*&666 5&;262 26&*66 7&672 2&9*6 9&299 &%6 &*2; &%6 &*2

5*6&666 = 5*&%66 - 5&%66 residual value

Case 27-3: Phuket each !otel: "aluin# $utually %&clusi'e Capital Pro(ects*

:ote: #hi cae i unchange$ from the #%elfth E$ition&

S"nopsis

4huket Beach otel has an opportunit# to lease its under-utilised space to a karaoke pu! and earn a rental income.

Alternativel#& the hotel could develop the unused space and create its own pu!. "he general manager o the hotelmust decide which o the two capital pro0ects to recommend to the hotel owners. "he case presents suicientinormation to !uild cashlow orecasts or each pro0ect and to rank the mutuall# e'clusive pro0ects using variousevaluation criteria.

Teaching >b(ecti,es

"his case ma# !e used to e'pose students to a range o capital-!udgeting issues:

"he principle o incremental anal#sis or identi#ing relevant cashlows or a pro0ect.

"he treatment o sunk costs& corporate overhead allocations& opportunit# costs& e'ternalities and social costs

in the identiication o relevant cashlows.


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;.

%. Fhich pro0ect should the hotel undertakeH

Anal"sis

'$entify the rele!ant cahflo% an$ incremental cahflo%

(n evaluating the pro0ects in this case& we should ocus on those cashlows that occur i and onl# i we accept thepro0ects. "hese cashlows& called incremental cashlows& represent the changes in the irms total cashlow that

EMary Ho prepare$ thi #eaching (ote un$er the uper!iion of Prof& Su Han Chan an$ Prof& )o *ang a a gui$eline toteaching: +Phuket Beach Hotel: Valuing Mutually Exclui!e Capital Pro"ect,& - by #he .ia Cae Reearch Centre/ #he

0ni!erity of Hong )ong&

occurs as a direct result o accepting the pro0ects. "he# include changes in e'isting revenues& e'penses and ta'escaused !# a pro0ects acceptance. "he inancial controller in this case stresses the importance o identi#ing utureproits instead o cashlows. tudents should note that accounting proits are not the relevant measure o !eneits.

'gnore unk cot

A sunk cost is an outla# that has alread# !een committed or that has alread# occurred& hence is not aected !# thedecision under consideration. (n this case& the overhead e'penses and salar# e'penses o the e'cess la!our can !econsidered as sunk costs. 3ote that repairs and maintenance e'penses will increase i the karaoke pro0ects areaccepted. (n this situation& it is appropriate to include such incremental e'penses in the cashlow estimates or !othpro0ects.

Coni$er externalitie

'ternalities represent the eects o a pro0ect on other parts o the irm. (n this case& the possi!le reduction in roomsales should !e considered in the anal#sis or !oth pro0ects. "he social eects o the pro0ects are diicult to)uanti# #et the# should !e taken into account i the detrimental eect on the hotel will aect the pro0ects uturecashlows.

Coni$er opportunity cot

+ t it t hl th t ld ! t d t th i l d id d it i t d


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) +on-,iscounte, Cashflo .echni/ues

0a Payback perio,/see note1

Ad,antages Disad,antages

(s simple and eas# to understand (gnores the time value o mone#

Can !e used as a rough screening tool (gnores cashlows !e#ond the pa#!ack period

erves as a useul indicator o a pro0ects

riskiness and li)uidit#

election o the ma'imum accepta!le pa#!ack

period is ar!itrar#

0b 'era#e return on in'estment

/=Average annual cashlow ater ta'es 3et investment1


(s simple and eas# to understand (gnores time value o mone#

Can !e used as a rough screening tool


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3ote:

"he discounted pa#!ack method is similar to the regular pa#!ack method e'cept that it discounts cashlows at thepro0ects cost o capital. (t considers the time value o mone# !ut it ignores cashlows occurring ater the pa#!ackperiod.

)) iscounte, Cashflo .echni/ues

0c )nternal rate of return 0)RR


"akes into account the time value o mone# 4ossi!le e'istence o multiple (RRs

(s& in general& consistent with the irm goal o

shareholder wealth ma'imisation

Re)uires more complicated calculations

Re)uires detailed long-term orecast o

incremental costs and !eneits

(mplicitl# assumes that the intermediate

cashlows rom the pro0ect are reinvested at the(RR& rather than at the opportunit# cost ocapital

0, Profitability )n,e& 0P)


(s consistent with the irm goal o shareholder

wealth ma'imisation

Re)uires detailed long-term orecast o

incremental costs and !eneits

"akes into account the time value o mone# and

the scale o investment

0e +et Present "alue 0+P"



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S*mmar" of !es*lts

>or detailed computations and assumptions& please reer to E3hibits T:-1 and 2.

Lease >ption Planet @arao0e P*b *ild >ption each @arao0e P*b

Pa"bac0 2.9% #ears .*9 #ears

Disco*nted pa"bac0 .6 #ears 9.; #ears

A,erage ret*rn on in,estment 6

+!! 2 7

P+ .2 .22

:P9 %;&67 !aht 7&69 !aht

E?*i,alent ann*it" .EA/ ;2&6% !aht *7&;9; !aht

"he a!ove summar# shows that ranking conlicts have arisen. "he irst our measures avour the lease option whilethe 4( and 34J measures avour the !uild option. "he last measure& e)uivalent annuit#& which solves the une)ual

lie pro!lem& also avours the !uild option. /4lease reer to the earlier e'hi!it on the pros and cons o using eachmeasure.1

"he graph !elow illustrates the classic Gcross-overI pro!lem& in which conlict in pro0ect rankings arises on the !asiso the 34J and (RR criteria. "he standard approach to this pro!lem is to rel# on the ranking !# 34J& !ecause theimplicit reinvestment-rate assumption in the 34J method is more reasona!le than that in the (RR method.

+P" Profiles of the 4ease an, uil, 5ption

"he graph shows that the 34J proiles o the two pro0ects cross over when the discount rate used is %. "he

ranking conlict !etween 34J and (RR disappears at discount rates a!ove %. 3ote that the !uild options netpresent value proile has the steeper slope& indicating that a given change in discount rate has a larger eect on itsnet present value. "he !uild option has a greater sensitivit# !ecause it oers rising cashlows in the later #ears. (tscashlows in the later #ears have a relativel# smaller present value at higher discount rates.


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582& %;*&92* 76&6 Build

58& .base/ 12/345 67/181 Buil$

587& /;;2&%%1 /;9&61 Re0ect !oth

1 /&;*&*1 /&;7&971 Re0ect !oth

Sensiti'ity nalysis: upfront in'estment

6 increase in *pfront

in,estment

Lease >ption EA

.baht/

*ild >ption EA .baht/ Decision

56 .base/ 12/345 67/181 Buil$

&6 9&9;6 ;7&%*6 Build

156 &9 27&*% Lease

256 ;&6*2 /&21 Lease

$56 /&*61 /&%91 Re0ect !oth

Sensiti'ity nalysis: cost of capital

Cost of capital Lease >ption EA

.baht/

*ild >ption EA .baht/ Decision

6 %%&%7% 22&;;7 Build

1587&6 .base/ 12/345 67/181 Buil$

126 9%&;% 7&2 Build

1%6 %&267 9;&622 Build

16 2;&72 *&279 Lease

16 ;&6;7 /*&**1 Lease


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.he 4ease 5ption

Cost of capital

Patronage

actor

6 1587&6 126 1%6 16 16

5 &27&22 &2%&;6 &2;%& &29;&; &29&6 &222&;%

582& %72&;2 %;*&92* %;&729 %96&*% %2&*%2 %*&76%

58& %%&%7% ;2&6% 9%&;% %&267 2;&72 ;&6;7

587& /;&%61 /;;2&%%1 /;;*&%;1 /;%*&9;;1 /;7*&971 /;**&;21

1 /&9;&*771 /&;*&*1 /&%&**1 /&7&71 /&*2&;*71 /&2&291

ifference in %/ui'alent nnuity 0in baht

uil, - 4ease8

Cost of capital

Patronage

actor

6 1587&6 126 1%6 16 16

5 &67 %*&9*% ;7&92 96&*%6 2&;9 ;&7

582& 7&;9 ;&;%2 9&%* 29&*7 *&69* /*&*1

58& ;;&** 9&% 29&7% *&*; /7&9*1 /2&9%1

587& *&%* 7&7; *&22 /7&26*1 /22&291 /*&61

1 26&9;; 7 /*&;1 /2&21 /*&961 /;&*71


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6.; 2.;6

6.7; *.7;

2;

/>igures in !aht e'cept where otherwise stated1

#ear 5 1 2 $ %

3et room revenueE &266&666 &9%9&666 9&7&666 9&*99&666

Reduction in net room

revenue &%;6&666 &%*&666 &7%7&2; &*;;&;66

#ear 5 1 2 $ %

Rental income 2&696&666 2&696&666 2&92&666 2&92&666

Less: Depreciation e'pense /2&;661 /2&;661 /2&;661 /2&;661

(ncrease in repairsU maintenance /6&6661 /6&6661 /6&6661 /6&6661

Reduction in netroom revenue /&%;6&6661 /&%*&6661 /&7%7&2;1 /&*;;&;661

Additional operatingincome *7&;66 ;9&;66 72&7; *9&666

Less: ta'es /;%&2;61 /9%&;61 /;&71 /2;&2661

3+4A" &2;6 6*&;6 26&%% ;*&*66

Add: Depreciation 2&;66 2&;66 2&;66 2&;66Less: Capital e'penditure /776&6661

+perating cashlow /776&6661 2&7;6 66&%;6 &% 2;&66


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E(et room re!enue ; Room re!enue > Room operating expene

Pa"bac0 2.9% Kears

Disco*nted pa"bac0 .6 Kears

A,erage ret*rn on in,estment

+!! 2

Profitabilit" +nde3 .2

:P9 %;&67 Baht

EA ;2&6% Baht

EPT+>: EAC= @A!A>@E P) A:AL#S+S > >PE!AT+: CAS=L>'

4ro0ect lie % #ears

Qpront investment

- renovation *66&666 !aht

- e)uipment 66&666 !aht

"a' rate 6

cost o capital 6.7;

ales growth rate ;


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/>igures in !aht e'cept where otherwise stated1

#ear 5 1 2 $ % &

3et roomrevenue &266&666 &9%9&666 9&7&666 9&*99&666 ;&96&666 ;&99&666

Reduction innet roomrevenue &%;6&666 &%*&666 &7%7&2; &*;;&;66 &*2&;66 &6&7;

#ear 5 1 2 $ % &

ales 9&%72&666 9&6;&%66 ;&;6&**6 ;&96*&929 ;&%7*&*9; ;&%2&7*7

Less: >ood and!everage cost /&%*&6661 /&22%&9661 /&2*7&7261 /&;2&6%1 /&9&71 /&96&%71

+ther operatinge'penses /&627&*961 /&67&221 /&&91 /&*&*;1 /&29&9%1 /&&*1

(ncrease inrepairs andmaintenance /6&6661 /6&6661 /6&6661 /6&6661 /6&6661 /6&6661

Depreciation /2*&1 /2*&1 /2*&1 /2*&1 /2*&1 /2*&1

Reduction innet roomrevenue /&%;6&6661 /&%*&6661 /&7%7&2;1 /&*;;&;661 /&*2&;661 /&6&7;1

Additionaloperatingincome ;2&*27 %2&%; %%&;6* 77&% *2&;; %&;%

Less: ta'es /;&*9*1 /*7&661 /266&*;21 /2;&2*1 /297&*%1 /2*6&71

3+4A" 72&7 9%&;99 9%*&%;% ;62&92 ;7%&7%* %;;&;*

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Add:Depreciation 2*& 2*& 2*& 2*& 2*& 2*&

%;%&2 7&*7* 7;&* 7*;&%7; *%6&62 *&2

Less: Capitale'penditure /2*&1 /2*&1 /2*&1 /2*&1 /2*&1 /2*&1

Qprontinvestment /&766&6661 - - - - - -

+peratingcashlow /&766&6661 72&7 9%&;99 9%*&%;% ;62&92 ;7%&7%* %;;&;*

Discountedoperatingcashlow /&766&6661 %&77; ;;& 9;&66 &6% 9%&%; ;;&2*9

Pa"bac0 .*9 Kears

Disco*nted pa"bac0 9.; Kears

A,erage ret*rn on in,estment 6

+!! 7

Profitabilit" +nde3 .22

:P9 7&69 Baht

EA *7&;9; Baht

27-2

solution manual for accounting

Documents

purpose o

aware o

omission o depreciation

tet discussion o

discussion o presentvalue

thorough understanding

e capital proect

aseparate item o cost