Redrum Hotel Is Considering a Project with a 5-Year Life

question 27

Multiple Choice

Redrum Hotel is considering a project with a 5-year life and which would require a $325,000 investment in equipment with no salvage value. The project would provide income each year as follows for the life of the project: $\begin{array}{lr}\text { Sales }&&\$225,000\\\text { Variable costs } & \$ 80,000 \\\text { Fixed costs } & 95,000&175,000\\\text { Income before taxes }&&\$50,000\end{array}$ The income tax rate is 30%. Depreciation is included in the fixed costs amount. The company's required rate of return is 8%. Calculate the payback period for this project.

• A) 3.25 years
• B) 6.50 years
• C) 2.83 years
• D) 9.29 years

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Definitions:

Substitution Effect

The shift in buying habits caused by alterations in the comparative costs of products, resulting in consumers substituting higher-priced items with those that are more affordable.

LED Light Bulbs

Energy-efficient lighting devices that use light-emitting diodes to produce light, known for having a longer lifespan and lower energy consumption compared to traditional bulbs.

Marginal Utility Per Dollar

The additional satisfaction gained from spending one more dollar on a good or service.

Substitution Effect

The substitution effect occurs when consumers change their consumption of goods in response to changes in relative prices, substituting cheaper goods for more expensive ones.