Corporate Finance Assignment: Investment Analysis for Barmores In Bulbs
Question
Task:
Go through the case study of Lighting the Way at the Manor House Hotel by Samuel G. Hanson, Joel Heilprin and Charles Andersen and prepare a corporate finance assignment identifying the problem faced by the business in the selected case.
Answer
Introduction
The corporate finance assignment report hereunder will be analyzing the investment to be made by the Barmores in bulbs for the hotel. There are four choices out of which the most efficient and investment-friendly option will be suggested to the Barmores. According to the Barmores, the discounting rate is 10%; however, in this report, there will be calculations for when the discount rate is 6%.
1. Investment analysis for Barmores
Data sets
|
Lighting per room |
Fixtures per room |
Number of rooms |
Daily hours per bulb |
Annual hours per bulb |
Total hours |
|
Suites |
12 |
10 |
2.74 |
1000 |
120000 |
|
Deluxe |
7 |
40 |
2.74 |
1000 |
280000 |
|
Single |
5 |
50 |
2.74 |
1000 |
250000 |
|
Total |
100 |
650000 |
|||
|
Total number of bulbs |
650 |
||||
|
Annual days of operation |
365 |
||||
Table 1: Lighting usage
(Given in the case study)
|
Philips |
Philips |
Philips |
Cree |
|
|
Light bulb specifications |
60 Watt Equivalent Incandescent |
60-Watt Equivalent Twister CFL |
60-Watt Equivalent LED 19A |
60-Watt Equivalent LED |
|
Cost per bulb |
$ 0.41 |
$ 4.47 |
$ 12.97 |
$ 12.97 |
|
Wattage (W) |
60 |
13 |
12.5 |
9.5 |
|
Lumen Output (lumens) |
860 |
840 |
800 |
800 |
|
Rated lifetime (hours) |
1000 |
12000 |
24000 |
24000 |
|
Dimmable |
Yes |
No |
Yes |
Yes |
Table 2: Specification of light bulb
(Given in the case study)
|
Operating cost data: |
|
|
Cost per kWh (US cent) |
11.23 |
|
Bulb replacement labour cost |
2.81 |
|
Expected annual inflation |
2% |
Table 3: Operational cost data
(Given in the case study)
Calculations
Cost of 650 bulbs per year:
|
Year1 |
Year2 |
Year3 |
Year4 |
Year5 |
|
|
60 Watt Equivalent Incandescent |
$ 266.50 |
$ 271.83 |
$ 277.27 |
$ 282.81 |
$ 288.47 |
|
60-Watt Equivalent Twister CFL |
$ 2,905.50 |
$ 2,963.61 |
$ 3,022.88 |
$ 3,083.34 |
$ 3,145.01 |
|
60-Watt Equivalent LED 19A |
$ 8,430.50 |
$ 8,599.11 |
$ 8,771.09 |
$ 8,946.51 |
$ 9,125.44 |
|
60-Watt Equivalent LED |
$ 8,430.50 |
$ 8,599.11 |
$ 8,771.09 |
$ 8,946.51 |
$ 9,125.44 |
Table 4: Price of 650 bulbs of each kind annually (inflation = 2% per annum inclusive)
(Made by author)
kWh of the bulbs:
|
60 Watt Equivalent Incandescent |
39000 |
|
60-Watt Equivalent Twister CFL |
8450 |
|
60-Watt Equivalent LED 19A |
8125 |
|
60-Watt Equivalent LED |
6175 |
Table 5: kWh of the bulbs
(Made by author)
Electricity bill cost of each bulb:
|
Year 1 |
Year 2 |
Year 3 |
Year 4 |
Year 5 |
|
|
60 Watt Equivalent Incandescent |
$ 4,379.70 |
$ 4,467.29 |
$ 4,556.64 |
$ 4,647.77 |
$ 4,740.73 |
|
60-Watt Equivalent Twister CFL |
$ 948.94 |
$ 967.91 |
$ 987.27 |
$ 1,007.02 |
$ 1,027.16 |
|
60-Watt Equivalent LED 19A |
$ 912.44 |
$ 930.69 |
$ 949.30 |
$ 968.29 |
$ 987.65 |
|
60-Watt Equivalent LED |
$ 693.45 |
$ 707.32 |
$ 721.47 |
$ 735.90 |
$ 750.62 |
Table 6: Electricity bill of each bulb (inflation = 2% per annum inclusive)
(Made by author)
Calculation of cost of 60-Watt Equivalent Incandescent for 5 years:
|
Years |
1 |
2 |
3 |
4 |
5 |
|
|
Initial cost of investment |
$ 266.50 |
|||||
|
Replacement cost of bulbs |
$ 271.83 |
$ 277.27 |
$ 282.81 |
$ 288.47 |
||
|
Bulb replacement labour cost |
$ 2.81 |
$ 2.87 |
$ 2.92 |
$ 2.98 |
||
|
Electricity bill |
$ 4,379.70 |
$ 4,467.29 |
$ 4,556.64 |
$ 4,647.77 |
$ 4,740.73 |
|
|
Total cost |
$ 4,646.20 |
$ 4,741.93 |
$ 4,836.77 |
$ 4,933.51 |
$ 5,032.18 |
|
|
Discount rate |
10% |
|||||
|
Discount factor |
0.91 |
0.83 |
0.75 |
0.68 |
0.62 |
|
|
Discounted cost |
$ 4,223.82 |
$ 3,918.95 |
$ 3,633.94 |
$ 3,369.65 |
$ 3,124.59 |
|
|
Total cost |
$ 18,270.95 |
|||||
Table 7: Total cost of bulb at 10% discount rate
(Made by author)
The initial cost of investment of 60-Watt Equivalent Incandescent is $266.50. Since the rated lifetime of 60-Watt Equivalent Incandescent is 1000 hours, therefore, the bulbs will stop working hence, new bulbs will have to be replaced every year (Enogwe, Oruh and Obiora-Ilouno, 2020). The fact that the price of each bulb is increasing by 2% annually, and there is a bulb replacement cost as well. Therefore, the total cost in year 1 is $4646.20. In year 2 the total cost of the bulb will increase to $4741.93, in year 3, it will increase to $4836.77; in year four cost of the bulb will increase to $4933.51, and the total cost in year 5 will be $5032.18. Therefore, the total cost incurred in 5 years will be $18270.95.
Calculation of cost of 60-Watt Equivalent Twister CFL for 5 years:
|
Years |
1 |
2 |
3 |
4 |
5 |
|
|
Initial cost of investment |
$ 4,740.73 |
|||||
|
Replacement cost of bulbs |
$ - |
$ - |
$ - |
$ - |
||
|
Bulb replacement labour cost |
$ - |
$ - |
$ - |
$ - |
||
|
Electricity bill |
$ 948.94 |
$ 967.91 |
$ 987.27 |
$ 1,007.02 |
$ 1,027.16 |
|
|
Total cost |
$ 5,689.66 |
$ 967.91 |
$ 987.27 |
$ 1,007.02 |
$ 1,027.16 |
|
|
Discount rate |
10% |
|||||
|
Discount factor |
0.91 |
0.83 |
0.75 |
0.68 |
0.62 |
|
|
Discounted cost |
$ 5,172.42 |
$ 799.93 |
$ 741.75 |
$ 687.81 |
$ 637.78 |
|
|
Total cost |
$ 8,039.69 |
|||||
Table 8: Total cost of bulb at 10% discount rate
(Made by author)
In year 1, the purchase cost of Twister CFL will be $5689.66. Since the rate lifetime of CFL is 12000 hours, each bulb has a life of 12 years since annually the bulbs are being used for 1000 hours. Therefore, the only cost to be incurred in the years subsequently will be the electricity bill. In year 2, the electricity bill will amount to $967.91. In years 3, 4, and 5, the electricity bill will be $987.27, $1007.002, and $1027.16 respectively. Therefore, the total cost at the end of 5 years will amount to $8039.69.
Calculation of cost of 60-Watt Equivalent LED 19A for 5 years:
|
Years |
1 |
2 |
3 |
4 |
5 |
|
|
Initial cost of investment |
$ 8,430.50 |
|||||
|
Replacement cost of bulbs |
$ - |
$ - |
$ - |
$ - |
||
|
Bulb replacement labour cost |
$ - |
$ - |
$ - |
$ - |
||
|
Electricity bill |
$ 912.44 |
$ 930.69 |
$ 949.30 |
$ 968.29 |
$ 987.65 |
|
|
Total cost |
$ 9,342.94 |
$ 930.69 |
$ 949.30 |
$ 968.29 |
$ 987.65 |
|
|
Discount rate |
10% |
|||||
|
Discount factor |
0.91 |
0.83 |
0.75 |
0.68 |
0.62 |
|
|
Discounted cost |
$ 8,493.58 |
$ 769.16 |
$ 713.22 |
$ 661.35 |
$ 613.25 |
|
|
Total cost |
$ 11,250.57 |
|||||
Table 9: Total cost of the bulb at 10% discount rate
(Made by author)
In year 1, the purchase cost of LED 19A will be $8430.50. Since the rate lifetime of LED 19A is 24000 hours, each bulb has a life of 24 years since annually the bulbs are being used for 1000 hours (Enogwe, Oruh and Ekpenyong, 2018). Therefore, the only cost to be incurred in the years subsequently will be the electricity bill. In year 2, the electricity bill will amount to $930.69. In year 3, 4, and 5, the electricity bill will be $949.30, $968.29, and $987.65 respectively. Therefore, the total cost at the end of 5 years will amount to $11250.57.
Calculation of cost of 60-Watt Equivalent LED for 5 years:
|
Years |
1 |
2 |
3 |
4 |
5 |
|
|
Initial cost of investment |
$ 8,430.50 |
|||||
|
Replacement cost of bulbs |
$ - |
$ - |
$ - |
$ - |
||
|
Bulb replacement labour cost |
$ - |
$ - |
$ - |
$ - |
||
|
Electricity bill |
$ 693.45 |
$ 707.32 |
$ 721.47 |
$ 735.90 |
$ 750.62 |
|
|
Total cost |
$ 9,123.95 |
$ 707.32 |
$ 721.47 |
$ 735.90 |
$ 750.62 |
|
|
Discount rate |
10% |
|||||
|
Discount factor |
0.91 |
0.83 |
0.75 |
0.68 |
0.62 |
|
|
Discounted cost |
$ 8,294.50 |
$ 584.56 |
$ 542.05 |
$ 502.63 |
$ 466.07 |
|
|
Total cost |
$ 10,389.82 |
|||||
Table 10: Total cost of bulb at 10% discount rate
(Made by author)
In year 1, the purchase cost of LED will be $8430.50. Since the rate lifetime of LED is 24000 hours, each bulb has a life of 24 years since annually the bulbs are being used for 1000 hours. The only cost to be incurred in the years subsequently will be the electricity bill. In year 2, the electricity bill will amount to $707.32. In year 3, 4, and 5, the electricity bill will be $721.47, $735.90, and $750.62 respectively. Therefore, the total cost at the end of 5 years will amount to $10389.82.
Recommending Barmores
The cost of purchasing the 60-Watt Equivalent Incandescent is $18270.95, the highest among the four options. Therefore, this is not a very financially healthy option. Even though the company manages to purchase the bulbs from a cheap supplier, the annual electricity bill will be very high. Apart from higher cost in general, the company will be causing higher electricity consumption (Zarifyan et al., 2021). Therefore, this option is not sustainable as well. Also, the fact that the rated lifetime is 1000 hours only therefore, this option will lead the company to generate higher waste material which is not environmentally friendly as well.
In the case of 60-Watt Equivalent Twister CFL, the total cost incurred in the 5 years is $8039.69 which is fair investment that can be made. Analyzing the fact that it is not required to be replaced every year is a positive aspect. Therefore, wastage is less hence, this option will be sustainable for the environment as well. However, it is not dimmable therefore, the customers who will be visiting the hotel might not like it as it will always be bright. Also, the dimmable function helps in lowering the power consumption allowing the business to reduce the electricity bill expense.
Therefore, the other two options must be evaluated. Evaluating the 60-Watt Equivalent LED 19A, its total cost is $11250.57 and the cost of 60-Watt Equivalent LED is $10389.82. Therefore, the cost of electricity bill incurred by 60-Watt Equivalent LED 19 A is higher than that of 60-Watt Equivalent LED. Hence, the electricity expenditure of the company is lower if the 60-Watt Equivalent LED is being installed (Faccia and Mosco, 2019). Also, the total cost of 60-Watt Equivalent LED is lower than the 60-Watt Equivalent LED 19A. Although, this option is costlier than the 60-Watt Equivalent Twister CFL, however, the 60-Watt Equivalent LED is dimmable. Therefore, the customers will happier with this function and the company will be incurring lower expenditure in electricity bills.
Summary: Install the 60-Watt Equivalent LED by Cree. On the flip side, the initial cost of investment in the 60-Watt Equivalent LED is high therefore, the company should try to bargain or negotiate with the supplier such that the purchasing cost is reduced. If the purchasing cost falls then total cost will reduce further which will be more beneficial for the company’s point of view.
2. Discount rate reduced to 6%
If the discount rate is reduced to 6% then the cost will definitely increase.
Calculation
Calculation of cost of 60-Watt Equivalent Incandescent for 5 years:
|
Years |
1 |
2 |
3 |
4 |
5 |
|
|
Initial cost of investment |
$ 266.50 |
|||||
|
Replacement cost of bulbs |
$ 271.83 |
$ 277.27 |
$ 282.81 |
$ 288.47 |
||
|
Bulb replacement labour cost |
$ 2.81 |
$ 2.87 |
$ 2.92 |
$ 2.98 |
||
|
Electricity bill |
$ 4,379.70 |
$ 4,467.29 |
$ 4,556.64 |
$ 4,647.77 |
$ 4,740.73 |
|
|
Total cost |
$ 4,646.20 |
$ 4,741.93 |
$ 4,836.77 |
$ 4,933.51 |
$ 5,032.18 |
|
|
Discount rate |
6% |
|||||
|
Discount factor |
0.94 |
0.89 |
0.84 |
0.79 |
0.75 |
|
|
Discounted cost |
$ 4,383.21 |
$ 4,220.30 |
$ 4,061.05 |
$ 3,907.80 |
$ 3,760.34 |
|
|
Total cost |
$ 20,332.70 |
|||||
Table 11: Total cost of bulb at 6% discount rate
(Made by author)
If the discount rate is reduced to 6% then the discounted cost per year will increase such that in year 1,2,3,4, and 5, the cost will be $7383.21, $7220.30, $4061.05, $3907.80, and $3760.34 respectively. The resulting cost incurred by the company in five years will be $20332.70. Therefore, due to the increase in discount rate the cost will increase by 11% (Espinoza et al., 2020).
Calculation of cost of 60-Watt Equivalent Twister CFL for 5 years:
|
Years |
1 |
2 |
3 |
4 |
5 |
|
|
Initial cost of investment |
$ 4,740.73 |
|||||
|
Replacement cost of bulbs |
$ - |
$ - |
$ - |
$ - |
||
|
Bulb replacement labour cost |
$ - |
$ - |
$ - |
$ - |
||
|
Electricity bill |
$ 948.94 |
$ 967.91 |
$ 987.27 |
$ 1,007.02 |
$ 1,027.16 |
|
|
Total cost |
$ 5,689.66 |
$ 967.91 |
$ 987.27 |
$ 1,007.02 |
$ 1,027.16 |
|
|
Discount rate |
6% |
|||||
|
Discount factor |
0.94 |
0.89 |
0.84 |
0.79 |
0.75 |
|
|
Discounted cost |
$ 5,367.61 |
$ 861.44 |
$ 828.93 |
$ 797.65 |
$ 767.55 |
|
|
Total cost |
$ 8,623.18 |
Table 12: Total cost of bulb at 6% discount rate
(Made by author)
The decline in the rate of discount will reduce the discounted cost as well. Therefore, in the five years the discounted cost will amount to $5367.61, $861.44, $828.93, 797.65, and $767.55. The total cost of purchasing the CFLs’ will be $8623.18. Due to the reduction the discount rate to 6% there will be an increase in total cost of CFL by 7%. However, this investment will be better than that of the previous choice of bulbs as the cost is nearly 57% more than that of the Incandescent bulb.
Calculation of cost of 60-Watt Equivalent LED 19A for 5 years:
|
Years |
1 |
2 |
3 |
4 |
5 |
|
|
Initial cost of investment |
$ 8,430.50 |
|||||
|
Replacement cost of bulbs |
$ - |
$ - |
$ - |
$ - |
||
|
Bulb replacement labour cost |
$ - |
$ - |
$ - |
$ - |
||
|
Electricity bill |
$ 912.44 |
$ 930.69 |
$ 949.30 |
$ 968.29 |
$ 987.65 |
|
|
Total cost |
$ 9,342.94 |
$ 930.69 |
$ 949.30 |
$ 968.29 |
$ 987.65 |
|
|
Discount rate |
6% |
|||||
|
Discount factor |
0.94 |
0.89 |
0.84 |
0.79 |
0.75 |
|
|
Discounted cost |
$ 8,814.09 |
$ 828.31 |
$ 797.05 |
$ 766.97 |
$ 738.03 |
|
|
Total cost |
$ 11,944.45 |
Table 13: Total cost of bulb at 6% discount rate
(Made by author)
The decline in the rate of discount will reduce the discounted cost as well. Therefore, in the five years the discounted cost will amount to $8814.09, $828.31, $797.05, 766.97, and $738.03 respectively for the 5 years. The total cost of purchasing the CFLs’ will be $11944.45. Due to the reduction the discount rate to 6% there will be an increase in total cost of CFL by 6%. Although the cost incurred in this option is higher than that of the previous option however, these bulbs have the option to dim the light thereby, allowing the company to reduce the energy consumption (Shcherbakova and Shcherbakov, 2020).
Calculation of cost of 60-Watt Equivalent LED for 5 years:
|
Years |
1 |
2 |
3 |
4 |
5 |
|
|
Initial cost of investment |
$ 8,430.50 |
|||||
|
Replacement cost of bulbs |
$ - |
$ - |
$ - |
$ - |
||
|
Bulb replacement labour cost |
$ - |
$ - |
$ - |
$ - |
||
|
Electricity bill |
$ 693.45 |
$ 707.32 |
$ 721.47 |
$ 735.90 |
$ 750.62 |
|
|
Total cost |
$ 9,123.95 |
$ 707.32 |
$ 721.47 |
$ 735.90 |
$ 750.62 |
|
|
Discount rate |
6% |
|||||
|
Discount factor |
0.94 |
0.89 |
0.84 |
0.79 |
0.75 |
|
|
Discounted cost |
$ 8,607.50 |
$ 629.51 |
$ 605.76 |
$ 582.90 |
$ 560.90 |
|
|
Total cost |
$ 10,986.58 |
Table 14: Total cost of bulb at 6% discount rate
(Made by author)
The decline in the rate of discount will reduce the discounted cost as well. Therefore, in the five years the discounted cost will amount to $8607.50, $629.51, $605.76, $582.90, and $560.90 respectively for the 5 years. The total cost of purchasing the CFLs’ will be $10986.58. Due to the reduction the discount rate to 6% there will be an increase in total cost of CFL by 5.7%. This option is better than the previous option because the cost of purchasing is lesser.
Summary
The decline in the rate of discount to 6% increase the total cost of installation of the bulbs. However, just like the recommendations made during the discount rate being 10%, the LED bulb from Cree must be installed.
Conclusion
As per the discussion and calculation it can be stated that the most investment friendly option for Barmores is installing LED bulbs from Cree. Although, the cost incurred in 5 years is slightly more than that of the CFL bulbs however, the Cree bulbs have the option to dim the light as well. In a hotel people e might enjoy this feature very much therefore, from the point of view of the investment and customers the installation of bulbs from Cree is the best investment for Barmores.
References
Enogwe, S.U., Oruh, B.I. and Ekpenyong, E.J., 2018. A modified replacement model for items that fail suddenly with variable replacement costs. American Journal of Operations Research, 8(6), pp.457-473. https://www.scirp.org/journal/paperinformation.aspx?paperid=88295
Enogwe, S.U., Oruh, B.I. and Obiora-Ilouno, H.O., 2020. Determination of Optimal Replacement Age of LED Light Bulbs in Hotel Rooms. https://www.researchgate.net/profile/Samuel-Enogwe/publication/339540620_Determination_of_Optimal_Replacement_Age_of_LED_
Light_Bulbs_in_Hotel_Rooms/links/5e603939a6fdccbeba1c8792/Determination-of-Optimal-Replacement-Age-of-LED-Light-Bulbs-in-Hotel-Rooms.pdf
Espinoza, D., Morris, J., Baroud, H., Bisogno, M., Cifuentes, A., Gentzoglanis, A., Luccioni, L., Rojo, J. and Vahedifard, F., 2020. The role of traditional discounted cash flows in the tragedy of the horizon: Another inconvenient truth. Mitigation and Adaptation Strategies for Global Change, 25(4), pp.643-660. https://www.researchgate.net/profile/Farshid-Vahedifard/publication/334752594_The_role_of_traditional_discounted_cash_flows_in_the
_tragedy_of_the_horizon_another_inconvenient_truth/links/5d4315e5299bf1995b5e444f/The-role-of-traditional-discounted-cash-flows-in-the-tragedy-of-the-horizon-another-inconvenient-truth.pdf
Faccia, A. and Mosco, D., 2019. Understanding the Nature of Accounts Using Comprehensive Tools to Understand Financial Statements. https://essuir.sumdu.edu.ua/bitstream/123456789/75516/1/Faccia_Understanding_the_Nature.pdf
Shcherbakova, N.A. and Shcherbakov, V.A., 2020, March. Formation of Cash Flow-Based Factor Models in the System of Value-Based Management. Corporate finance assignment In Proceedings of the International Scientific Conference" Far East Con"(ISCFEC (Vol. 128, p. 743). https://www.atlantis-press.com/article/125936656.pdf
Zarifyan, A., Mustafin, A., Valentseva, E. and Shapshal, A., 2021. Capacity Utilization Level Of Freight Electric Locomotives And Evaluation Of Expense Reduction On Consumed Energy Due To Modernization. Transport Problems, 16(4). https://www.exeley.com/transport_problems/doi/10.21307/tp-2021-055
