The $2 billion Wynn Las Vegas opened on April 28th, 2005. Most recently, Mr. Wynn was Chairman of the Board, President and CEO of Mirage Resorts, Incorporated and its predecessor from 1973 to 2000. Wynn Resorts Ltd. plans to expand by opening another resort, “Encore,” next to Wynn Las Vegas, which is slated to open in 2008. Final AnalysisThe Current Post Reorganization stock price is set for $14. By this measure, the Market, Industry and Select comps all indicate TER is undervalued. Based on this equation TER’s EV/EBITDA multiple is 8, resulting in a stock price of $15. Because of those challenges, a reconciliation of forward-looking non-GAAP financial measures is not available without unreasonable effort. Identify the other factors Wardl would have to incorporate in its estimate of the maximum price Lyan would be willing to pay for the equipment. The Wardl production schedule calls for 12,000 direct labor hours per month during the first quarter. If Wardl is awarded the contract for the Lyan equipment, production of one of its standard products will have to be reduced. This is necessary because production levels can only be increased to 15,000 direct labor hours each month on short notice. Furthermore, Wardl’s employees are unwilling to work overtime. Wardl Industries is a manufacturer of standard and custom-designed bottling equipment. Early in December 20X3, Lyan Company asked Wardl to quote a price for a custom-designed bottling machine to be delivered on April 1, 20X4. Lyan intends to make a decision on the pur­chase of such a machine by January 1 so Wardl would have the entire first quarter of 20X4 to build the equipment. Explain why some companies calculate the payback period in addition to determining the NPV. The old equipment is fully depreciated and is not included in the fixed over-head. The old equipment from the plant can be sold for a salvage amount of $1,500. Jonfran has no alternative use for the manufacturing space at this time, so if the waste containers are purchased, as discussed next, the old equipment would be left in place. Without prejudice to your response to previous requirements, assume that Reutzel recorded the lease on December 31, 20X4, as a capital lease in the amount of $673,300. Prepare all the journal entries required to record the capital lease on the books of Reutzel for the fiscal year ended December 31, 20X5. Explain the four criteria used to determine that a lease should be accounted for as a capital lease by the lessee. The cost of the trucks to Dallas is $650,000, and each truck has an expected useful life of nine years. LeToy Company produces a wide variety of chil­dren’s toys, most of which are manufactured from stamped parts. The Production Department recom­mended that a new stamping machine be acquired. The Production Department further recommended that the company consider using the new stamping machine only for five years. Top management has con­curred with the recommendation and has assigned Ann Mitchum of the Budget and Planning Department to supervise the acquisition and to analyze the alternative financing available. Garrison Corporation is considering the replacement of an old machine that is currently being used.

  • “We believe that our Plan continues to provide investors with a compelling and superior total shareholder return value proposition, which is why the management team and our employees continue to invest in ENB.”
  • OLG may establish a new gaming zone in the GTA and OGGLP has the right of first opportunity to build a new casino in the area.
  • For our regression analysis, we selected a broader sample of 29 companies from the Gaming and Lodging sector to more accurately compare against the industry.
  • The cost of the trucks to Dallas is $650,000, and each truck has an expected useful life of nine years.
  • You can change your consent settings at any time by unsubscribing or as detailed in our terms.

Shares in Big Rock Brewery are down a lot on poor financial results. But the craft brewer has no debt, substantial cash holdings and is trading close to its net asset value. Guests staying at the hotel can sit down to a unique dining experience at the on-site restaurant, ideally situated for those who want to stay close by at mealtime. Those looking for after-dinner entertainment can visit the property’s casino. Company OverviewWynn Resorts, Limited recently opened Wynn Las Vegas, a concept of Stephen A. Wynn, which is considered the preeminent luxury hotel casino in Las Vegas.

RSI Stock Analysis Summary

Thus, Lyan has had to purchase 500,000 bottles from a supplier at $0.40 each. The new equipment would allow Lyan to manufacture its entire annual demand for bottles at a raw material cost savings of $0.01 for each bottle manufactured. The company will depreciate the general-purpose machine over ten years using the sum-of-the-years-dig­its method. At the end of five years, the accumulated depreciation will total $80,000. (The present value of this amount for the first five years is $62,100.) The special-purpose machine will be depreciated over five years using the SYD method. Its salvage value at the end of that time is estimated to be $30,000. Jonfran employs a plantwide fixed overhead rate in its operations. If the waste containers are purchased outside, the salary and benefits of one supervisor, included in the fixed overhead at $45,000, would be eliminated. There would be no other changes in the other cash and noncash items included in fixed over­head, except depreciation on the new equipment. • Reutzel pays the executory costs (insurance, taxes, and other fees not included in the annual lease pay­ments) of $485 per year and depreciates all of its trucks using straight-line depreciation. The new equipment is a Supraimage X-ray 400 machine priced at $1,000,000, including shipping and installation, and would be delivered January 1, 1984. Its annual depreciation expense will be $400,000, $240,000, $144,000, $108,000, and $108,000, respectively, over five years. The machine will have no sal­vage value at the end of five years. The second alternative would be for LeToy to purchase the equipment outright from the manufacturer for $240,000. LeToy can claim an investment tax credit of $16,000 if it purchases the equipment. Preliminary discussions with LeToy’s bank indicate that the firm would be able to finance the asset acquisition with a 15% term loan. 23.39 Considering mutually exclusive projects and income tax consequences. Calculate the present value of the aftertax cash inflow arising from the disposal of the old machinery. 23.33 Calculating and comparing all the financial analysis methods. IRR because all reinvestment of funds occurs at the rate of the cost of capital and because it takes into account the relative size of the original investment. NPV because all reinvestment of funds occurs at the discount rate that will make the NPV of the project equal to zero. IRR because all reinvestment of funds occurs at the discount rate that will make the NPV of the project equal to zero. Aftertax rate of interest for debt and stated annual dividend rate for preferred stock. Pretax rate of interest for debt and stated annual dividend rate for preferred stock. The payback period method and accounting rate of return method. A simple method of performing sensitivity analysis where only one or two input parameter values are varied deterministically. ­ Considers cash flows over the entire life of the project.

Although these problems are based on chapter material, reading extra material, reviewing previous chap­ters, and using creativity may be required to develop workable solutions. Calculate the relevant present value cost of the purchase alternative for LeToy Company. Hazman Company plans to replace an old piece of equipment that is obsolete and expected to be unreliable under the stress of daily operations. The equipment is fully depreciated and will have no salvage value. • Will replace an old asset that currently has a tax base of $80,000 and can be sold now for $60,000. • Qualifies as three-year property under the modified accelerated cost recovery system . Considered part of the original investment when determining the NPV. Cash inflows of different time periods are treated equally. Then, for each Monte Carlo iteration, obtaining a random number for each parameter becomes a simple process of selecting one value from each column randomly. After obtaining the random parameter values, the NPV calculation was done. The NPV was saved for each iteration, and a cumulative mean value was calculated. The iterations were stopped when the cumulative mean value did not vary more than $250 and the cumulative variance did not vary more than $62,500 ($250 x $250) from iteration to iteration. If the scanner is purchased, Mercy plans to depreciate the scanner over five years using the straight-line method. Involves altering parameter values randomly within a specified probability distribu­tion and observing the probability distribution and statistics. A technique used to perform probabilistic sensitivity analysis in a wide variety of disciplines. Capital projects that have no significant bearing on one another. Involves altering parameters to specific or determined values and observing the spe­cific results. Data for its calculation are relatively easy to obtain from the financial accounting system. ­ Results in terms of a percentage may be more meaningful to managers than the NPV or PVI. NPV is generally the superior method to use in selecting the best project. The previous example of Tahoe Ski Lodge’s NPV calculation can be used to illustrate the graphical method. Where Y is a yearly annuity amount, P is the present value percentage, and C is the original cost. Sensitivity analysis is the tool that enables management accountants to meet this objective. Although the ARR method measures profitability, it has a major weakness. With ARR, a dollar received ten years from now is viewed as being just as valuable as a dollar received today. This defect becomes more significant the further one advances in time. The Cascade industries case uses the original investment. Any donations made to the Shelburne Community Fund will be issued a charitable tax receipt by the DCF. Gallaugher previously noted the fund could support projects such as trails enhancement, programs for children or seniors, recreation and healthcare. Processing customer sale transactions and accurately following cash handling procedures. Perform administrative duties, including cash register readings, orbit, inventory, banking, ordering and the administration of the “Be a Star Program.”. By comparing RSI’s EV/Sales multiple to that of competitors, Rush Street Interactive fair value ranges for the RSI stock price from $22.2 to $30.55. According to court documents, Spence received Supplemental Security Income benefits from the Social Security Administration and served as the representative payee for five of her minor children. In addition, she also received Supplemental Nutrition Assistance Program and Medicaid benefits through the Florida Department of Children and Families . Today’s “Fraud of the Day” is based on a Department of Justice press release entitled, “Tampa Woman Sentenced To Prison for Social Security Fraud,” released on April 23, 2018. The Haines City woman, who was the representative payee for her five minor children, received Supplement Security Income benefits from the Social Security Administration .

Appendix A: GTA Gaming Bundle Gaming Zones

Is most appropriate for financial analysis problems that are too complex for the graphical method, but are simple enough to “program” into a com­puter spreadsheet. This method simply uses the ability of computer spreadsheets to recalculate results quickly for changes in any input parameter value. The effects of changes in input parameters can be quickly observed in any of the output result values. Works best for simple models where only one or two input parameter values will be varied deterministically , and where there is a single output result of interest. Although it is possible to use this method for probabilistic analysis, it is not recommended. Each element of cost savings is multiplied by the inflation index. The tax shield from the annual deprecia­tion expense is not multiplied by the inflation factor, however, since this increase in value due to inflation is not allowed as a deduction by the Internal Revenue Service. Common financing strategies involve purchase or lease decisions. Under certain situations, making or constructing the capital project is a third alternative. Measures the number of years needed for a project to accumulate enough cash to pay for the initial cost of the investment. It is also interesting to note that if the PVI had been used, Project 2 would have been selected, with a PVI of 1.44 compared to a PVI of 1.42 for Project 1. Clearly, this is not the wiser choice because the remaining $30,000 can be put to better use. Therefore, if investments are mutually exclusive, the NPV method may be a better approach to ranking projects. The PVI indicates the best return per dollar invested, but does not consider the alternative possibilities of unused funds. When the cash inflows are not uniform, as is usually the case, the rate is calculated by a trial-and-error pro­cess. Various rates are tried until the correct one is found. The correct rate is the one where the present value of the cash inflows is equal to the present value of the investment. The Euclid Machinery case on the next page illustrates the calculation of the IRR. Strong math skill and understanding discounted cash flow calculations and basic accounting. In year 2020, operating expenses were 148% of revenues, but this is neither sustainable not static. The high OpEx resulted from establishing strategic partnerships with firms and are not recurring costs. Here, the assumption is that after one-time partnership costs incurred during expansion and attaining the learning from experience, RSI would be able to reduced its operating expenses from 124% to 60% gradually(8% YoY). Their real-money online casino and online sports betting offerings are provided under and brands in the United States and under brand in Colombia. The Company operates real-money online casino and online sports wagering in New Jersey and Pennsylvania. It also operates online sports wagering in Indiana, Colorado and Illinois and provides retail sports wagering services in Illinois, Pennsylvania, New York, Indiana and Michigan. In 2018, RSI became the first U.S.-based online gaming operator to launch in Colombia, which was an early adopting Latin American country to legalise and regulate online casino and sports betting nationally. The additional income earned from gambling at the casino increased the woman’s available resources. If income increases while an individual is receiving government benefits, then their total amount of benefits received will be reduced. (This is why many people don’t report any additional income.) In today’s case, the multiple federal and state programs paid her $100,000 in SSI, SNAP and Medicaid benefits she would not have qualified for. The FAO produces independent analysis on the initiative of the Financial Accountability Officer. OGGLP announced in April of 2018 that it intends to relocate Casino Ajax to a new development site in the City of Pickering. The casino will be hosted at the Durham Live complex and is expected to be operational by late 2019. The FAO includes both Casino Ajax and Durham Live in its presentation because the FAO estimates financial benefits from Casino Ajax until its relocation. The GTA Gaming Bundle includes the OLG Slots at Woodbine, the OLG Slots at Ajax Downs, and Great Blue Heron Casino. Overall, the GTA Gaming Bundle generates about $0.6 billion in revenue for the Province from over 4,000 slot machines and 60 table games. The Woodbine and Ajax facilities include live horse racing and betting, but these activities are owned and operated by private companies. As part of OLG’s gaming review, OLG recommended the expansion of regulated private sector delivery.

You can change your consent settings at any time by unsubscribing or as detailed in our terms. In summary we can say that based on the above assumptions, RSI stocks are undervalued. Below is the summarized price range of RSI stock based on various analyses, which can also be represented in football field . Based on above assumptions the fair value of RSI stock is $19.19. The sensitivity analysis of variation in assumptions can be checked in attachments below. Peer analysis with comparable companies based on P/S multiple suggests that RSI stock has a higher probability of being undervalued. RSI’s fair value by P/S analysis ranges from $6.8 to $16.89, averaging at $11.85. Want to learn more about fraud against the government and how to stop it? On this website, you will find thousands of articles focused on key fraud topics and their impact on government and public benefits. Mr. Benson has 30 years of experience in sales and business development. Before joining LexisNexis® Risk Solutions, he spent 12 years founding and managing two software technology startups. During the 1990s he spent 10 years as a Regional Director helping to grow a New England-based technology company from 300 employees to 7,000. He started his career with Martin Marietta Aerospace working on laser guided weapons and day/night vision systems. The relocated casino is within the gaming zone C3 boundary. As such, gaming expansion will likely be pursued by OGGLP. However, OLG may be liable to compensate OGGLP in the event of failed gaming expansion, should OGGLP provide sufficient evidence to OLG that reasonable attempts were made to expand. Additionally, OLG’s review proposed changes to its lottery terminals and sports betting, and to build a new entertainment centre in Niagara Falls. OLG may establish a new gaming zone in the GTA and OGGLP has the right of first opportunity to build a new casino in the area. Also, OGGLP has the option to close a casino, and then build a new casino, so long as it remains within the original gaming zone, subject to provincial and municipal approvals. OLG will continue to conduct and manage gaming for the GTA Gaming Bundle on behalf of the Crown in accordance with the Criminal Code. OLG will continue to establish rules of play and impose standards for responsible gaming to maintain compliance with Alcohol and Gaming Commission regulations. OLG will also review and approve OGGLP’s business plan, additions of material non-gaming amenities and amendments to lease agreements. Alexander Valtsev majored in finance at the University of Toronto. He now works for an investment bank and plans to launch his own investment fund in September. More French employees than ever quit their jobs at the end of 2021 and start of 2022, as the balance of bargaining power shifts away from employers, a labour ministry study showed on Thursday. Tensions in the labour market, where bosses in some branches such as construction or hospitality increasingly struggle to recruit enough people, fed the trend, translating into job opportunities for many employees. Search for Skyline Hotel and Casino discounts in Las Vegas with KAYAK. Search for the cheapest hotel deal for Skyline Hotel and Casino in Las Vegas. KAYAK searches hundreds of travel sites to help you find and book the hotel deal at Skyline Hotel and Casino that suits you best.

Dover Downs Hotel & Casino

With a 20 percent IRR, the pres­ent value is $1,550 less than the investment ($200,000 – $198,450). The IRR of 19.64 percent is much larger than the 12 per­cent desired rate of return, or hurdle rate. Are capital projects that have no specific bearing on one another. For example, acquisition of a local area network is not related to the acquisition of a fleet of trucks. The Shelburne Community Fund is based on using interest income earned from donations to provide grants to qualified projects and charities that will enhance the quality of life for local residents. During the period of stay-at-home orders, RSI’s business volume significantly increased and has continued to remain strong as many of orders were lifted. COVID-19 has also directly impacted sports betting due to the rescheduling, reconfiguring, suspension, postponement and cancellation of major sports seasons and sporting events. I hate to break it to you, but you have a much better chance of being struck by lightning than winning the lottery or the jackpot on a poker machine. She committed Social Security fraud by not reporting her gambling earnings, which would have made her ineligible to receive government benefits from multiple programs. The four resort casinos are operated under contract by private operating companies. Further, OLG imposes maximum electronic and table game positions for each gaming zone, as well as maximum limits relative to other zones within the GTA Gaming Bundle. For example, if the gaming position limit is maximized at Casino Woodbine and 5,000 electronic games are established, then only 3,000 electronic games would be available for the new GTA casino. In addition, Provincial policy is to direct 2 per cent of OLG slot machine gross revenue, excluding OLG’s resort casinos and Great Blue Heron Casino, to problem gambling funding. The FAO estimates that a total of $775 million from GTA Gaming Bundle revenue will be directed to problem gambling funding over the next 22 years, or $303 million on an NPV basis. Over the initial 22-year term of the Casino and Operating Services Agreement , the FAO estimates that the GTA Gaming Bundle will contribute a total financial benefit to the Province of about $34.5 billion. The Ontario Lottery and Gaming Corporation sells lottery games and conducts and manages gaming facilities in Ontario.

Up to this point, the management accountant has already set up a systematic way for management to par­ticipate in the capital budgeting methodology. In addition, promising capital projects were subjected to various financial analysis methods, such as the NPV and PVI. Conducting sensitivity analysis provides management with still another way to gain insight into the capital investment decisions that must be made. In almost any decision-making process, conducting sensitivity analysis will enable the situation to be eval­uated more thoroughly so that a better decision can be made. The discounted cash flow methods can be adjusted for inflation by increasing the discount rate and the expected cash flows by a factor to allow for the anticipated inflation. The inflation adjustment is made on the basis of some specific index that management believes to be applicable to the industry in which the enterprise operates. In other words, Tahoe could spend up to $542,880 for the new ski lift chase the new ski lift and still obtain the 16 percent rate of return it desires. The net present value of $42,880, therefore, provides a “cushion” or “margin of error” for the company in estimating the benefits of the new project. Another reason for raising the discount rate is the shareholder short-term mindset for quick returns. Amer­ican managers often feel pressure from fidgety shareholders to recoup investments fast. At public compa­nies, the average holding period for stocks is two years. Consequently, the discount rates used to evaluate projects are higher than in other countries and much higher than their cost of capital. Higher discount rates do not encourage managers to make long-term capital investments. New projects being evaluated must earn a rate of return equal to or higher than the marginal cost of capital in order to maintain or increase the value of an enterprise. Alternatively, weighted-average cost of capital based on historical capital sourcing values may not be relevant to future sources of investment funds. The equipment used to manufacture the waste container must be replaced because it has broken and can­not be repaired. The new equipment would have a purchase price of $945,000 with terms of 2/10, n/30; company policy is to take all purchase discounts. The freight on the equipment would be $11,000, and installation costs would total $22,900. The equipment would be purchased in December 20X3 and be placed into service on January 1, 20X4. It would have a five-year economic life and would be treated as three-year property under the modified accelerated cost recovery system . This equipment is expected to have a salvage value of $12,000 at the end of its economic life in 20X8. The new equipment would be more efficient than the old equipment, resulting in a 25% reduction in both direct materials and variable overhead. The savings in direct materials would result in an additional onetime decrease in work­ing capital requirements of $2,500 due to a reduction in direct materials inventories. This working capital reduction would be recognized at the time of equipment acquisition. Mercken Industries is contemplating four projects, D, E, F, and G. The capital costs for the initiation of each project and its estimated aftertax cash inflows are listed below. Mercken’s desired aftertax opportunity cost is 12%, and the company has a capital budget for the year of $450,000. Rockyford is subject to a 40% income tax rate for all ordinary income and capital gains and has a 10% aftertax cost of capital. All operating and tax cash flows are assumed to occur at year-end. Neither capital project will have a salvage value at the end of its useful life. Both capital projects will be depreciated using the straight-line method. For the following calcula­tions, ignore income taxes and the half-year convention. The expected annual cost of generating earnings available for the capital projects is 12%. Excello can issue long-term bonds at an annual interest rate of 10%. In an ordinary annuity, the series of cash inflows occur at the end of the periods. If a capital project generates $2,000 of annual cash inflows for four years at a discount rate of 10 percent, then the present value of this annuity is $6,340 ($2,000 annuity x 3.170 present value factor). Preferred stock usually has a contractual dividend rate.

Some managers set the discount rate higher than the cost of capital because they recognize that indirect costs sometimes increase as the enterprise expands. Also, some capital projects are riskier than others because their outcome is more difficult to estimate. Managers will need some type of counterbalance or cushion for accepting the riskier alternatives. This cushion frequently takes the form of a higher discount rate. Because of the compounding nature of discounted cash flow methods, this method of adjusting for risk implicitly assumes that risk increases over time. Using financial analysis methods , managers evaluate and compare alternative projects included in the Capital Projects Portfolio Statement. Such candidate capital projects will usually differ in the amount of initial investment required, terms of useful life, amount and timing of cash flows, salvage value, and cost of capital. Exhibit 23-1 illustrates the cost of capital calculations for Cyberlink Corporation using a traditional inter­nally-focussed method. There are other ways to compute the WACC that you will learn in your finance classes. The interest rate on debt is expected to be 10 percent, and debt is 20 percent of the sources of capi­tal funds. Cyberlink’s income tax rate is expected to be 40 percent over the next number of years. Preferred stock contributes up to 10 percent of capital funds, and its effective rate is expected to be 12 percent. Com­mon stock comprises 40 percent of capital funds at an estimated future cost of 18 percent. Retained earn­ings and recovered capital provide 30 percent of capital funds at an estimated future cost of 16 percent. Based on the computations in the exhibit, Cyberlink’s expected weighted-average cost of capital is 14.4 percent. This means that it will cost Cyberlink an average of 15 percent of each dollar annu­ally to finance capital projects. Managers exercise a significant amount of subjectivity in choosing the amount by which the discount rate will be increased to account for risk. In any capital budgeting decision, the estimation of costs, benefits, and cash flows, as well as risk, will always involve subjectivity. As the previous chapter pointed out, man­agers may also allow for risk in their estimates of feasibility factors and the amount and timing of cash flows. For example, the technology feasibility factor of a state-of-the-art capital project may be purposely weighted lower than a capital project involving traditional technology with which the organization is familiar. Or, the estimated future cash inflows of a risky project may be systematically reduced. Discount rates based on weighted-average cost of capital apply to investment decisions but not to financing deci­sions. The incremental cost of debt is the basic rate for discounting in financing decisions. Thus, in Exhibit 23-11, both sets of cash flows are discounted at 6 percent.

casino dcf

Management believes the presentation of these measures gives useful information to investors and shareholders as they provide increased transparency and insight into the performance of the Company. Jonfran Company must decide whether to purchase the waste containers from an outside supplier or to purchase the equipment to manufacture the waste containers. Calculate the NPV of the estimated aftertax cash inflows at December 31, 20X3, and determine which of these two options to pursue. Plasto Corporation is a manufacturer of plastic products. The company is embarking on a five-year mod­ernization and expansion plan. Thus, management is identifying all of the capital projects that it should consider. Financial analyses will be prepared for each identified project. Plasto will not select and imple­ment all of the projects because some may not be financially attractive and some are mutually exclusive. In addition, not all projects can be implemented because capital funds are limited. One piece of equipment being considered would provide annual cash savings of $7,000 before income taxes. The equipment would cost $18,000 and have annual depreciation of $3,600 for five years, for both book and tax purposes. It would have no salvage value at the end of five years. If the replacement occurs, a new machine would be acquired from Hillcrest Industries on January 2, 20X3. The purchase price of $1,000,000 for the new machine would be paid in cash at the time of replacement. Due to the increased efficiency of the new machine, estimated annual cash savings of $300,000 would be generated through 20X7, the end of its expected useful life. The new machine is not expected to have any salvage value at the end of 20X7. The Comstock Company is considering purchasing a machine costing $10,000. The rate of return at which the present value of the net cash inflows minus the investment in the capital project equals zero. The PP method calculates the amount of time needed to recoup the initial investment that the capital proj­ect requires. The ARR method divides the original or average investment into the estimated average annual income after depreciation and income taxes. Discuss the discounted cash flow methods, and explain the net present value , internal rate of return , and present value index methods. Examination of the graph indicates that the NPV is very sensitive to the yearly revenue, but not particularly sen­sitive to changes in the residual value. It is assumed that a company whose tax rate is 34 percent pur­chases a delivery truck at a cost of $20,000, an estimated useful life of six years, and an estimated residual value of $4,000. Under MACRS, the delivery truck is a five-year property and is depreciated for tax pur­poses using the 200 percent declining-balance method with a half-year convention. Depreciation expense for federal income tax purposes is calculated at the right side of the exhibit. As already indicated in the Metric case, the PP method does not measure profitability and ignores cash inflows beyond the payback period. A further criticism of the PP method is that it does not consider the time value of money. A cash inflow to be received several years in the future is weighted equally with a cash inflow to be received today. Moreover, by taking a short-term perspective, management disregards long-term benefits and can place an enterprise in jeopardy with com­petitors. Can a conclusion be drawn about ranking mutually exclusive projects? The problem with mutually exclu­sive projects is that they may rank differently with each of the discounted cash flow methods. One project may have the highest NPV, another the highest PVI, while another has the highest IRR. In most situations, however, the NPV is preferable to either the IRR or the PVI for ranking mutually exclusive projects. Accepting one of a set of candidate capital projects causes all the others to be rejected. By accepting a particular project, the other projects in the set are excluded from further con­sideration because they would provide unneeded or redundant capability. Acquiring computer A from an array of computers that perform essentially the same functions is a mutually exclusive project. A replace­ment project, such as whether to keep an old machine or acquire a new one, is another example. The most troublesome aspect of calculating cost of capital is determining the cost of the common equity component of capital. Some argue that the proper rate is the expected earnings per share divided by the current market value of the stock. Others contend that the cost of common equity funds is a function of expected dividends and expected share price.

Financial Analysis

Calculate the present value of the aftertax cash inflows for the next four years attributable to the operat­ing cash savings. Reinvestment of the cash inflows will be made at the discount rate. The payback period is the time it takes for the cumulative sum of the cash inflows to equal the initial cash outlay (i.e., the investment). For Primerate, the payback period for the LAN project is 2.58 years. The ratio of the present value of a capital project’s net cash inflows to the initial investment required. Management at Tahoe Ski Lodge, however, is uncertain of the yearly increased cash inflows, thinking that they could be as high as $180,000 or as low as $140,000. Also, management believes the residual value of the lift could be $0, $40,000, or $65,000. With these determin­istic values, NPVs were calculated, resulting in the table below. This rate does not include an adjustment for inflation, which is expected to average 8 percent over the next five years.

  • Virtual’s income tax rate is 40%, and its discount rate is 12%.
  • Tahoe Ski Lodge is considering acquiring a new ski lift that will cost $500,000.
  • Assuming that all revenue earned in a period is collected and that depreciation is the only noncash expense, the approximation is exact.
  • As such, gaming expansion will likely be pursued by OGGLP.
  • Revenue to the Province is OLG’s net income plus a Win Contribution of 20 per cent of OLG’s gaming revenue from its resort casinos and Great Blue Heron Casino.

The results of financial analysis are directly dependent on the parameter values used. Yet, since these parameter values are not known with certainty, it is quite possible that a change in a particular parameter’s value might significantly affect the financial results. Conversely, a change in a particular parameter’s value might not affect the results at all, or very little. Two mutually exclusive capital projects are compared in Exhibit 23-6. Project A generates the higher NPV, and Project B produces a larger IRR. The NPV method assumes that cash inflows from Project B will be reinvested to earn 12 percent, the discount rate. Alternatively, the IRR method assumes that the cash inflows generated by Project B will be reinvested to earn 22.90 percent. If this is true, then Project B is the better alternative. Finding new capital projects that yield such high rates of return would be extremely difficult, however. If the project’s cash inflows are not reinvested at the IRR, the ranking calculations obtained from the IRR method may be in error. In many situations, the NPV method may give more reasonable results because the reinvestment is assumed to be the cost of capital, a more likely scenario. Virtual Optical Disk Company is considering the purchase of a laser device for $400,000 that will reduce operating costs by $150,000, $200,000, $250,000, and $300,000 in years 1, 2, 3, and 4, respectively. Its useful life is four years, and Vir­tual uses the sum-of-the-years-digits depreciation method. Virtual’s income tax rate is 40%, and its discount rate is 12%.

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Consequently, this rate can be used to determine the effective cost of acquiring additional capital from the issuance of preferred stock. Unlike interest on debt, however, dividends are not deductible for income tax purposes. Thus, the effective rate is the annual contractual dividend per share divided by the estimated future share price. The GTA Gaming Bundle region currently has 4,000 slot machines and 60 table games, with approval to expand to 11,100 electronic games and 570 table games. The FAO’s financial benefit calculation assumes that gaming expansion will reduce the revenue per electronic game and table game due to market saturation. Additionally, there is a risk of sales cannibalization among casinos because there may not be sufficient demand for gaming in the GTA region and existing customers could switch to the new casino. For electronic games, the FAO assumes a 3 per cent decline in revenue per slot machine due to new slot machines at existing locations. The FAO assumes an additional 15 per cent reduction in revenue per slot machine due to the new casino opening in the GTA. For table games, the FAO assumes a relatively small drop in revenue per table, as there are currently only 60 table games in the GTA Gaming Bundle region, all of which are located at Great Blue Heron Casino. Wardl estimates that Lyan’s annual bottle demand will continue to be 5,000,000 bottles over the next five years, the estimated economic life of the special-purpose equipment. Wardl further estimates that Lyan has an aftertax cost of capital of 15% and is subject to a 40% marginal income tax rate, the same rates as Wardl. Tarmack Company is considering the purchase of a machine for $350,000 with a life of five years and a salvage value of $50,000. The machine will be depreciated using the straight-line method. (Ignore the half-year convention.) The machine is expected to produce cash inflows from operations, net of income taxes, of $100,000 annually in each of the next five years. Management at Secure System is considering acquiring a machine that will manufacture a new automobile security device. The machine will cost $200,000 with a useful life of four years and no salvage value. There is some management disagreement as to the amount of net cash inflows the machine will produce. Also, management believes the project should be analyzed assuming discount rates of 8, 10, and 12%, respectively. Describe the impact of income taxes, purchasing versus leas­ing, and inflation on capital budgeting financial analysis. As previously given, the expected additional yearly cash inflows for a new ski lift are $160,000. The lift would cost $500,000 and have a useful life of five years and a salvage value of $40,000. These values result in an NPV of $42,880 at a discount rate of 16 percent.

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She also received Supplemental Nutrition Assistance Program and Medicaid benefits from the Florida Department of Children and Families . This figure shows the gaming zones and boundaries for the GTA Gaming Bundle within a broader map of the GTA region. The C2 Gaming Zone, in which Casino Woodbine is located, is situated in the west GTA, near Toronto Pearson International Airport. The C3 Gaming Zone, in which Casino Ajax is located, is situated in the east GTA, bounded by Pickering to the west and Whitby to the east. The C8 Gaming Zone, in which the Great Blue Heron Casino is located, is situated in the north-east, on the Mississaugas of Scucog Island First Nation Reserve, just north of Port Perry. Page 4 of Part 1 of OLG’s RFP on the GTA Gaming Bundle provides a map of the gaming zones. As of April 13, 2018, the combined market capitalizations of Great Canadian Gaming Corporation and Brookfield Business Partners was over $8 billion. The OLG Slots at Ajax Downs is expected to relocate to the proposed Durham Live complex in the City of Pickering in late 2019. All dollar amounts are in Canadian, current dollars (i.e. not adjusted for inflation) unless otherwise noted. OLG announced in August of 2017 that Ontario Gaming GTA LP was the successful bidder, purchasing the GTA Gaming Bundle assets for $170 million. The final agreement between OLG and OGGLP, known as the Casino Operating and Services Agreement , was executed in January of 2018. “There are still opportunities among small-caps because many such companies are underfollowed by major banks, yet remain good businesses with solid cash generation.” Communicating with shareholders is a key part of his approach. “This is a quick way to find material information without spending a lot of time on research.” A growing number of families on low incomes are relying on food banks due to the rising cost of living.