Spring 2020 Tourism Finance Test 1. Sam earned $100,000 in 2019 and paid $15,000 in taxes. Mary earned $120,000 the same year and paid $18,000 in taxes. If these taxes were paid to the same government agency, is the tax on income progressive, regressive, or proportional? How did you reach this conclusion? 2. Robert E. Grant is interested in starting a business that will take tourists on 4-day excursions around the northern part of Georgia to view and hike around historical American Civil War sites. This will involve providing transportation to and from his home base in Athens Georgia, as well as food and transportation, and lodging during the 4-day excursion. Before starting his business there are a number of things he wants to make sure of. First, he wants the business income to flow directly to his own personal tax return. Second, he wants to make sure that his personal assets, such as his home, are not at risk due to any type of legal problems his business may run into, such as an injury to a client, or difficulty in paying financial obligations of the business. Third, he wants to make sure that he maintains as much control as possible over the operations of the business. Basically, Grant needs the answer to two questions A. Given, these basic concerns Grant has in starting his business, what form(s) of business ownership would you recommend for him and why? B. Grant has determined that he needs about $20,000 over and above the $10,000 he has in savings to get the business up and running. Given what you already know about Grants desires and expectations for his business, what type of financing should he seek to obtain this $20,000? Why? 3. You have taken over the finance function of a large and successful outdoor gear store that sells primarily camping equipment such as tents, cooking gear, backpacks, and other smaller items. The owner of this store wants to get a better handle on the variation of sales of tents over the course of the year. She asks you to develop a process by which sales forecasts of tents can be made with more reliability. Up to now, there has not been a systematic process in place for forecasting tent sales, she just looked at what sales were each month, and estimated what she thought they might be in the future, based purely on her intuition. You decide to create a table for three forecasting methods to illustrate each approach to the store owner, compute the forecast for January 20, and provide an indication of which approach is best. Month/Year Actual Sales 3-Moving Average W1 = .2; W2 = .3; W3 = 5. _ = .3 Weighted Moving Average Exponential Smoothing Forecast Actual Difference Absolute Deviation Forecast Actual Difference Absolute Deviation Forecast Actual Difference Absolute Deviation Oct 18 1400.00 Nov 18 1500.00 Dec 18 1800.00 1600.00 Jan 19 1700.00 1566.67 133.33 233.33 1630.00 70.00 70.00 1660.00 40.00 40.00 Feb 19 1500.00 1666.67 -166.67 166.67 1690.00 -190.00 190.00 1672.00 -172.00 172.00 Mar 19 1500.00 1666.67 -166.67 266.67 1620.00 -120.00 120.00 1620.40 -120.40 120.40 Apr 19 1500.00 1566.67 -66.67 33.33 1540.00 -40.00 40.00 1584.28 -84.28 84.28 May 19 1600.00 1500.00 100.00 133.33 1500.00 100.00 100.00 1559.00 41.00 41.00 June 19 1700.00 1533.33 166.67 200.00 1550.00 150.00 150.00 1571.30 128.70 128.70 July 19 1800.00 1600.00 200.00 200.00 1630.00 170.00 170.00 1609.91 190.09 190.90 Aug 19 1900.00 1700.00 200.00 200.00 1730.00 170.00 170.00 1666.94 233.06 233.06 Sept 19 1700.00 1800.00 -100.00 100.00 1830.00 -130.00 130.00 1736.85 -36.85 36.85 Oct 19 1700.00 1800.00 -100.00 100.00 1780.00 -80.00 80.00 1725.80 -25.80 25.80 Nov 19 1800.00 1766.67 33.33 33.33 1740.00 60.00 60.00 1718.06 81.94 81.94 Dec 19 1900.00 1733.33 166.67 166.67 1750.00 150.00 150.00 1742.64 157.36 157.36 Jan 20 Total n Mean A. Given the information in the table, compute the January 2020 forecasts for each method. Place your answer in the appropriate box or write the January 2020 forecasts for each method below. B. What forecasting model would you report to the store owner as the most effective? How did you determine this? Show any computations necessary and put the answers in the appropriate boxes or write your answers in the space below. 4. You are the owner of a whitewater raft company/retail outlet operating out of Northern Colorado. Your business has been quite successful, and you have decided to expand by opening a second operation in the Southeast United States. You have determined that this would require an initial investment of $250,000. A. What types of costs would you have to consider in arriving at that $250,000 figure? B. You also determined that this expansion would result in net cash inflows of $30,000 per year over the next 12 years. In speaking with your banker, the two of you estimate that you could earn, on average, 7% interest each year on this money if invested differently. Compute the following regarding this project. Be sure to show evidence of how you came up with the computations. i. Net Present Value ii. Profitability Index iii. Payback Period C. Based on the information above, would you open the new location in Southeast United States? Why or why not? 5. You have contracted to perform annual corporate motivation programs for a large Hotel Investment Conglomerate for the next five years. These programs will be based on annual week-long summer outdoor adventure programs designed for top, middle, and entry level managers in this corporation. The conglomerate has agreed to pay all direct and indirect expenses of putting on the programs as they occur. Over and above direct and indirect expenses for running these programs each year, the company has agreed to pay you additional compensation for your services. They have offered to do so in one of three ways. Option 1. The Company would pay you $15,000 per year for each of the five years the program is in place, plus a lump sum payment to you of $12,000 at the end of the five years as an inducement to complete the entire program. Assume a 6% discount rate. Option 2. The Company would pay your compensation in the form of a single lump sum payment of $70,000 right now to cover your compensation for the next five years. Assume a 6% discount rate. Option 3. The Company would pay your compensation in the form of a single lump sum payment of 100,000 five years from now to cover your compensation for the 5-year program. Assume a 6% discount rate. A. Based only on the monetary value of each of the options, which would you choose? What is the 2nd best option? The 3rd? Show your computations below each option above.
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