Use the following information to answer the next two questions. The Debonair Hotel is considering a kitchen investment with a ten year life. The investment will require an initial outlay of $120,780 and provide increased cash inflows of $24,000 per annum and generate increased running cost cash outflows of $6,000 per annum. There will be no salvage value at the end of the life of the investment.
-Assuming a 6% cost of capital, what is the net present value of the Debonair Hotel's kitchen investment?

Question

Quizplus · Accepted Answer

To calculate the net present value (NPV), we need to discount the cash inflows and outflows to their present values. Using a 6% discount rate (which is the cost of capital), we get:

PV of cash inflows = $24,000 * [(1 - (1 / (1 + 0.06)^10)) / 0.06] = $170,568.77
PV of cash outflows = $6,000 * [(1 - (1 / (1 + 0.06)^10)) / 0.06] = $42,642.19
PV of initial outlay = -$120,780 (this is negative because it's a cash outflow)

Now, we can calculate the NPV by adding up the present values of the cash inflows and outflows, and subtracting the present value of the initial outlay:

NPV = PV of cash inflows + PV of cash outflows + PV of initial outlay
NPV = $170,568.77 - $42,642.19 - $120,780
NPV = $7,146.58

Therefore, the net present value of the investment is $7,146.58, which is closest to answer B, $11,700. Since the NPV is positive, the investment would be profitable and the hotel should consider it.

Use the Following Information to Answer the Next Two Questions