7 d it is the third week in october and the company

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7 d) It is the third week in October and the company has no clients booked for the last week of the season, what would they save or lose by closing for that week? (4 marks) e) It is June and the company has no clients booked for the last week of the season, what would they save or lose by closing for that week? (4 marks) f) The company is considering expansion to include the winter months. The expansion will mean that the advertising campaign will change. The company has spent $30,000 developing its promotional material in 2004. There will be an additional $8,000 required to modify the material. The existing equipment, which the company will continue to use, is scheduled for regular maintenance of $12,000. The new equipment will be bought for $45,000 and is expected to last five years. Heating costs are expected to be twice as costly in the fall/winter season as the spring/summer season. The company will now pay the annual property tax over twelve months and not over six months. The managers take their two weeks of paid vacation in January. Tierra Lago will charge $600 per week in the fall/winter season and expects a 30% occupancy rate during the 26 weeks. They expect this 30% occupancy rate in winter to exist for several years. As management consultant advise the owner as to the wisdom of this expansion to a year-round operation. (10 marks) g) The company is considering the installation of a geo-thermal heating system to replace the natural gas furnace. The installation fee will be $20,000 and the maintenance manager will spend 20 hours in this process. The existing furnace cost $40,000 and has a book value of $35,000. The salvage value is currently $18,000. The geo-thermal system has a list price of $90,000 but your friend is willing to sell it to you for $65,000. It is estimated that the heating costs will be reduced by 70%. The company paid consultants $9,000 to determine if the geo-thermal system met environmental guidelines. The government is considering an $11,000 fee for operating a resort in alpine terrain. The government will provide a $4,000 annual environmental tax credit if natural gas is not used. Should the company switch to the geo-thermal heating system? (Assume year-round operation.) (10 marks)
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8 SOLUTION Question 1 (8 marks) Budgeting The following points/issues should have been made/raised: Departmental Bias Padding the budget Use it or loose it mentality It is still an estimation prone to the vulnerable to market forces Inflation Strikes Terrorism Election (buying of votes) It involves humans and the future. There is nothing simple about budgets and it is also very difficult to prevent manipulation. Inherent Evaluation problems: Self interest versus corporate interest Question 2 (18 marks) ROI and Residual Income a. Div. A = 400 - 225 - 150 = 25 = 12.5% 75 + 125 200 Div. B = 800 - 370 - 330 = 100 = 9.2% 435 + 650 = 1,085 Div. C = 600 - 360 - 175 = 65 = 6.5% 310 + 685 995 Div. A performed the best as it has the highest ROI (of 12.5%) b.
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