Essay on Finance Case
Bridgehampton Shores Inn:
Mutually Exclusive Project Comparison
Finance 203 – Managerial Finance
Dr. Anoop Rai Fall 2012
Capital Budgeting Case Study:
Bridgehampton Shores Inn: Mutually Exclusive Spa Projects
Bridgehampton Shores is an Inn located on the Eastern Inn of Long Island. It typically caters to families looking to vacation in the area and take advantage of all the East End has to offer. Currently, Bridgehampton Shores Inn has 10,000 square feet of available space for lease. Potentially, 1/5 of the available space will be used to build a pathway for connection purposes to their existing facilities and the remaining 4/5 …show more content…
In our comparison we have applied the corporate tax rate of 35% to all calculations for both projects. In addition, all findings listed below consider all three discount rates and both the higher amount and lower amount of the initial capital expenditure for both projects.
Cash outflows: Based on the terms of the lease, Bridgehampton is responsible to prepare the vacant space for lease, which amounts to an initial capital outlay for renovation of $225,000 to $265,000. This initial investment will be depreciated straight-line at $56,250-$66,250 over four years with a zero salvage value. The operating costs include Bridgehampton’s allocation of an annual facilities and maintenance charge of $14,500 to Suncoast. This consists of $12,000 pro rata share of facilities costs and $2,500 in annual maintenance.
Cash inflows: Bridgehampton will receive from Suncoast a monthly rent of $25,000 for the first 2 years ($300,000 per annum), and also receive 7% annual rent increase for the following two years ($321,000 and $343,470 respectively).
The findings of our financial analysis including the payback period(in years), the IRR and the EANPV of the Suncoast project are listed in the following tables:
| | Payback Period