Capital Budgeting Assignment

DISCU UNUL 201 PROBLEM 26.48) Capital Budgeting through Using Multiple Models Explain. Samba is a popular restaurant located in Brazelton Resort Management feels that enlarging the face to incorporate a large outdoor seating area will enable Samba to continue to attract existing customers as well as handle large banquet parties that now must be turned away. Two proposals are currently under consideration. Proposal A involves a temporary walled structure and umbrellas used for sun protection: Proposal B entails a more permanent structure with a full awning cover for use even in inclement weather. Although the useful life of each alternative is estimated to be 10 years, Proposal results in higher salvage value due to the awning protection.

The accounting department of Brazelton Resort and the manager of Samba have assembled the following data regarding the two proposals: 104 Required investment ……… Estimated life of fixtures……. Estimated salvage value Estimated annual net cash flow ….. Depreciation (straight-line basis).. Estimated annual net income ……. Proposal A $300.000 10 years $10,000 75,000 24,000 Proposal B $310.000 10 years $40,000 70,000 36,000 Instructions a. For each proposal. compute the (1) payback period, (2) return on average investment, and (3) net present value discounted at management's required rate of return of 10 percent. (Round the payback period to the nearest tenth of a year and the return on investment to the nearest tenth of a percent.) Use Exhibits 26-3 and 26-4 where necessary. b. Based on your analysis in part a, which proposal would you recommend? Explain the reasons for your choice.

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