You are the financial manager of Walnut Grove City, a small mid-eastern town, and in charge of creating a capital budget for the next year. The only project on the agenda is building a clock tower within the city square and expanding the adjacent park for small events. You must incorporate into the budget the expense of building a clock tower in the city's town square and adjacent park, and may choose the size, exact location and materials to be used. The expense for the clock tower is estimated to be $400,000 and clean-up of the adjacent park is estimated to be $50,000. After the expansion, three events are planned: 1. Street party celebrating the new clock tower and park which will continue as an anniversary party every year thereafter, and is expected to have a net income of $75,000; 2. Fourth of July fireworks celebration with expected net income of $125,000; and 3. Labor Day carnival to celebrate going back to school and harvest which is expected to have a net income of $50,000. All three events will be continued each following year.

Explain the five capital budgeting steps you will use and how each step will be associated with the clock tower project.

Investment Timing Option: Decision-Tree Analysis

Kim Hotels is interested in developing a new hotel in Seoul. The company estimates that the hotel would require an initial investment of $18 million. Kim expects the hotel will produce positive cash flows of $3 million a year at the end of each of the next 20 years. The project's cost of capital is 13%.

1. What is the project's net present value? Do not round intermediate calculations. Enter your answer in millions. For example, an answer of $1.23 million should be entered as 1.23, not 1,230,000. Round your answer to two decimal places.

   $    million

2. Kim expects the cash flows to be $3 million a year, but it recognizes that the cash flows could actually be much higher or lower, depending on whether the Korean government imposes a large hotel tax. One year from now, Kim will know whether the tax will be imposed. There is a 50% chance that the tax will be imposed, in which case the yearly cash flows will be only $2.2 million. At the same time, there is a 50% chance that the tax will not be imposed, in which case the yearly cash flows will be $3.8 million. Kim is deciding whether to proceed with the hotel today or to wait a year to find out whether the tax will be imposed. If Kim waits a year, the initial investment will remain at $18 million. Assume that all cash flows are discounted at 13%. Use decision-tree analysis to determine whether Kim should proceed with the project today or wait a year before deciding.

E14-23

Weyden Hotel​ & Casino is situated on beautiful Lake Tahoe in Nevada. The complex includes a​ 300-room hotel, a​ casino, and a restaurant. As Weyden​'s new​ controller, your manager asks you to recommend the basis the hotel should use for allocating fixed overhead costs to the three divisions in 2017. You are presented with the following income statement information for 2016​:

You are also given the following data on the three divisions.

You are told that you may choose to allocate indirect costs based on one of the​ following: direct​ costs, floor​ space, or the number of employees. Total fixed overhead costs for 2016 were $14,630,000.

Investment Timing Option: Option Analysis

Kim Hotels is interested in developing a new hotel in Seoul. The company estimates that the hotel would require an initial investment of $20 million. Kim expects the hotel will produce positive cash flows of $3 million a year at the end of each of the next 20 years. The project's cost of capital is 13%.

Kim expects the cash flows to be $3 million a year, but it recognizes that the cash flows could actually be much higher or lower, depending on whether the Korean government imposes a large hotel tax. One year from now, Kim will know whether the tax will be imposed. There is a 50% chance that the tax will be imposed, in which case the yearly cash flows will be only $2.2 million. At the same time, there is a 50% chance that the tax will not be imposed, in which case the yearly cash flows will be $3.8 million. Kim is deciding whether to proceed with the hotel today or to wait a year to find out whether the tax will be imposed. If Kim waits a year, the initial investment will remain at $20 million. Assume that all cash flows are discounted at 13%. Use the Black-Scholes model to estimate the value of the option. Assume that the variance of the project's rate of return is 0.0585 and that the risk-free rate is 6%. Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. Do not round intermediate calculations. Round your answer to three decimal places.

Use computer software packages, such as Minitab or Excel, to solve this problem.

??? milions

Investment Timing Option: Option Analysis Kim Hotels is interested in developing a new hotel in Seoul. The company estimates that the hotel would require an initial investment of $20 million. Kim expects the hotel will produce positive cash flows of $3 million a year at the end of each of the next 20 years. The project's cost of capital is 13%. Kim expects the cash flows to be $3 million a year, but it recognizes that the cash flows could actually be much higher or lower, depending on whether the Korean government imposes a large hotel tax. One year from now, Kim will know whether the tax will be imposed. There is a 50% chance that the tax will be imposed, in which case the yearly cash flows will be only $2.2 million. At the same time, there is a 50% chance that the tax will not be imposed, in which case the yearly cash flows will be $3.8 million. Kim is deciding whether to proceed with the hotel today or to wait a year to find out whether the tax will be imposed. If Kim waits a year, the initial investment will remain at $20 million. Assume that all cash flows are discounted at 13%. Use the Black-Scholes model to estimate the value of the option. Assume that the variance of the project's rate of return is 0.0687 and that the risk-free rate is 6%. Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. Do not round intermediate calculations. Round your answer to three decimal places. Use computer software packages, such as Minitab or Excel, to solve this problem. $ million

Kim Hotels is interested in developing a new hotel in Seoul. The company estimates that the hotel would require an initial investment of $16 million. Kim expects the hotel will produce positive cash flows of $2.56 million a year at the end of each of the next 20 years. The project's cost of capital is 12%.

A) What is the project's net present value? A negative value should be entered with a negative sign. Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Do not round intermediate calculations. Round your answer to two decimal places.

B) Kim expects the cash flows to be $2.56 million a year, but it recognizes that the cash flows could actually be much higher or lower, depending on whether the Korean government imposes a large hotel tax. One year from now, Kim will know whether the tax will be imposed. There is a 50% chance that the tax will be imposed, in which case the yearly cash flows will be only $1.6 million. At the same time, there is a 50% chance that the tax will not be imposed, in which case the yearly cash flows will be $3.52 million. Kim is deciding whether to proceed with the hotel today or to wait a year to find out whether the tax will be imposed. If Kim waits a year, the initial investment will remain at $16 million. Assume that all cash flows are discounted at 12%. Use decision-tree analysis to determine whether Kim should proceed with the project today or wait a year before deciding. Answers: 1) wait a year 2) decide now

Investment Timing Option: Option Analysis

Kim Hotels is interested in developing a new hotel in Seoul. The company estimates that the hotel would require an initial investment of $20 million. Kim expects the hotel will produce positive cash flows of $3 million a year at the end of each of the next 20 years. The project's cost of capital is 13%.

Kim expects the cash flows to be $3 million a year, but it recognizes that the cash flows could actually be much higher or lower, depending on whether the Korean government imposes a large hotel tax. One year from now, Kim will know whether the tax will be imposed. There is a 50% chance that the tax will be imposed, in which case the yearly cash flows will be only $2.2 million. At the same time, there is a 50% chance that the tax will not be imposed, in which case the yearly cash flows will be $3.8 million. Kim is deciding whether to proceed with the hotel today or to wait a year to find out whether the tax will be imposed. If Kim waits a year, the initial investment will remain at $20 million. Assume that all cash flows are discounted at 13%. Use the Black-Scholes model to estimate the value of the option. Assume that the variance of the project's rate of return is 0.0585 and that the risk-free rate is 6%. Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. Do not round intermediate calculations. Round your answer to three decimal places.

Use computer software packages, such as Minitab or Excel, to solve this problem.

$ ??? million

II. Room Pricing in the Off-Season (Modeling)

The data in the table, from a survey of hotels with comparable rates on Hilton Head Island, show that room occupancy during the off-season (November through February) is related to the price charged for a basic room.

The goal is to use these data to help answer the following questions.

1. What price per day will maximize the daily off-season revenue for a typical hotel in this group if it has  rooms available?

2. Suppose that for this typical hotel, the daily cost is  plus  per occupied room. What price will maximize the profit for this hotel in the off-season?

The price per day that will maximize the off-season profit for this typical hotel applies to this group of hotels. To find the room price per day that will maximize the daily revenue and the room price per day that will maximize the profit for this hotel (and thus the group of hotels) in the off-season, complete the following.

1. Multiply each occupancy rate by  to get the hypothetical room occupancy. Create the revenue data points that compare the price with the revenue, , which is equal to price times the room occupancy.

2. Find an equation that models the revenue, , as a function of the price per day, .

3. Use maximization techniques to find the price that these hotels should charge to maximize the daily revenue.

4. Find a model for the occupancy as a function of the price, and use the occupancy function to create a daily cost function.

5. Form the profit function.

6. Use maximization techniques to find the price that will maximize the profit.

Investment Timing Option: Option Analysis

Kim Hotels is interested in developing a new hotel in Seoul. The company estimates that the hotel would require an initial investment of $20 million. Kim expects the hotel will produce positive cash flows of $3 million a year at the end of each of the next 20 years. The project's cost of capital is 13%.

Kim expects the cash flows to be $3 million a year, but it recognizes that the cash flows could actually be much higher or lower, depending on whether the Korean government imposes a large hotel tax. One year from now, Kim will know whether the tax will be imposed. There is a 50% chance that the tax will be imposed, in which case the yearly cash flows will be only $2.2 million. At the same time, there is a 50% chance that the tax will not be imposed, in which case the yearly cash flows will be $3.8 million. Kim is deciding whether to proceed with the hotel today or to wait a year to find out whether the tax will be imposed. If Kim waits a year, the initial investment will remain at $20 million. Assume that all cash flows are discounted at 13%. Use the Black-Scholes model to estimate the value of the option. Assume that the variance of the project's rate of return is 0.0654 and that the risk-free rate is 8%. Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. Do not round intermediate calculations. Round your answer to three decimal places.

Use computer software packages, such as Minitab or Excel, to solve this problem.

$   million

1. Sjcam used a penetration pricing strategy to introduce its Legend action camera to compete with the latest GoPro offering. Which of the following conditions would argue for using a penetration pricing strategy when introducing this new camera?

a. A large potential market exists, even at a high price.

b. Technological problems still exist for competitors, prohibiting their entry into the market for at least six months.

c. Increasing volume substantially reduces production costs.

d. Consumers perceive a price-quality relationship.

e. The product is relatively price insensitive (price inelastic).

2. Apple offers its iPhone XS for $999, under the presumption that consumers see the smartphone as priced at “something over $900” rather than “about $1,000.” This is an application of what pricing strategy?

a. prestige pricing

b. below-market pricing

c. odd-even pricing

d. target pricing

e. customary pricing

3. Which of the following would be an example of a variable cost for a hotel like the Marriott Marquis Hotel, which caters to an upscale clientele?

a. the average daily rate paid by women in targeted demographics staying at the hotel

b. cleaning supplies and housekeeping wages

c. the salary of the hotel manager

d. the rent for a parking garage used by employees

e. the price charged for renting a ballroom in the hotel

4. Uber and Lyft customers often complain about the practice of “surge” or “prime-time” pricing used by these companies during periods of peak demand. This is an example of a __________ pricing policy.

a. promotional

b. competitive

c. discount

d. dynamic

e. customer