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    Too Hot to Handle: Case Study

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    See the case file attached.

    Exhibit 1 Some Relevant Information
    Salon Hours: Sunday, Monday Closed
    Tues-Thurs 9am - 7pm
    Fri 9am - 5pm
    Sat 9am - 2pm
    Advertising Costs $300 per month (Yellow Pages Ad)
    $200 per month (other advertisements)
    Patsy's After-tax cost of funds: 11% per year
    Depreciation method: Straight line over 5 yrs.
    Tax rate: 30%

    DOME UNIT TANNING BED
    Cost (including shipping) $7800 $2800
    Set up cost $500 $200
    Electricity cost per session $0.50 $0.30
    Number of sessions/hour 4 3
    Number of bulbs needed 48 28
    Cost per bulb $22 $22
    Bulb life 1300 hours 1300 hours
    Unit life 8 years 5 years
    Suggested price/visit $3 $3
    Space requirement +
    9 ft X 5ft X 5ft room 10 ft X 10 ft room

    Other income
    Tanning Lotion 1 bottle/10 sessions
    Profit per sale $5
    Questions 1-7:

    1. Develop operating cash flow forecasts for the relevant lives of each type of tanning equipment using 100% (Best case), 80% (Most Likely Case), and 50% (Worst Case) occupancy estimates for each tanning option. Assume straight line depreciation and a tax rate of 30%.

    2. Calculate and comment upon the accounting, cash, and financial break-even sales for the dome unit and the tanning bed unit respectively.

    3. Calculate the net present value, payback period, and the traditional IRR for each tanning option under the various scenarios. What do the decision rules indicate?

    4. Can Patsy evaluate this business project by assuming just a onetime purchase? Why or why not? What other evaluation methods should Patsy use?

    5. If you decide to use the replacement chain method, how do the calculation and decision change?

    6. What are some externalities, side effects, and other relevant issues that could affect the decision?

    7. Based upon your analysis, which of the two units is "Too Hot to Handle?" Why?

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    https://brainmass.com/business/capital-budgeting/223060

    Attachments

    Solution Preview

    Please see the attached files. The excel file has the calculations. I have put my comments in the cell for better understanding. The cells also have formula which can be looked at to understand how the figures are arrived at.

    Questions 1-7:

    1. Develop operating cash flow forecasts for the relevant lives of each type of tanning equipment using 100% (Best case), 80% (Most Likely Case), and 50% (Worst Case) occupancy estimates for each tanning option. Assume straight line depreciation and a tax rate of 30%.
    Please see the attached file

    2. Calculate and comment upon the accounting, cash, and financial break-even sales for the dome unit and the tanning bed unit respectively.

    The tanning bed unit has a lower breakeven for all accounting, cash and financial. The calculation is in the attached ...

    Solution Summary

    The posting has solution to the capital budgeting case - Too Hot to Handle

    $2.19

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