1. Describe the business project and the investment choice to be made.
a. Selecting which lighting fixtures to install for the hotel’s refurbishment
b. Determine which lighting figures offered lowest cost in PV terms at the hotel’s quality level
2. What factors have the Barmores considered regarding the project’s cash flows?
a. Initial investment cost
b. Rated lifetime of a bulb c. Replacement labor cost
d. Electricity cost per kWh, and potential changes in rates e. Inflation
3. What is the opportunity cost of capital? How was it determined?
a. Ten-percent (10%)
b. Advised by a REIT who explained that “its base of broadly diversified investors was currently requiring 10% for investments with similar risks and a similar time horizon…”
4. What investment criteria will the Barmores use to choose among the lighting options?
a. Best choice would be “the alternative which offered the lowest cost in present value terms without compromising the hotel’s quality standards.”
5. Briefly explain how you would solve this investment problem.
a. Determine cash flows
b. Determine opportunity cost of capital
c. Select time horizon d. Find PV of cash flows e. Compare to find lowest across alternatives, but keep in mind the hotel’s quality level.