Reference no: EM133189056

Question - The management of Flamingo Inn on the Rocks Inc. has decided to that with effect July 1, 2020, the hotel should be HACCAP certified. This move would require that the hotel replace its existing baking equipment in the kitchen. Five years ago, Flamingo Inn on the Rocks Inc. purchased the existing baking equipment at a cost of $450,000. The hotel uses a straight-line method to depreciate its baking equipment with a ten-year expected life. Currently, the market value of old equipment is $215,000.

Flamingo Inn on the Rocks Inc. received a quotation from Restaurant Equipment and Supplies Inc. For new baking equipment comprising kitchen aid mixers and stainless steel 3 deck convection oven at a purchase price of $900,000. The installation cost is an additional $55,000 and the electrical service would have to be upgraded in the kitchen to accommodate the new equipment. The cost of this upgrade is $35,000. The new baking equipment is expected to last the hotel 10-years. Over its 10-year life, it will reduce utility costs by $33,000 and other operating costs by $140,000 per year. The hotel will be required to invest working capital requirements by $40,000 at the beginning of the replacement and this. will be recovered at the end of the project.

It is estimated that the new baking equipment machine can be sold at the end of its life for $180,000. The resort uses a 15% cost of capital and is registered under the Tourism Development Act Cap 680 of the laws of Bimshire and therefore not subject to any taxation.

Required - Using the net present value method determine whether the new baking equipment should be installed.

1) Calculate the annual cash flows.

2) Calculate the terminal cash flows.