Question 5 On the basis of the data provided at question 3, what is your expected NPV if you invest $ 150 mi in this hotel today? Consider your WACC to be 10%. O a -$ 1,002,273 O b. $1,002,273 Oc $4,961,520 Od. -$ 911,158
Please only answer practice question 5.
Solution for questions 3 & 4 below:
Question 3. Option A
Year |
Formula |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
Growth rate (Revenue) |
|
|
1.02 |
1.03 |
1.04 |
1.03 |
1.025 |
1.025 |
Revenue |
Previous year rev* growth rate |
55.00 |
56.10 |
57.78 |
60.09 |
61.90 |
63.44 |
65.03 |
Growth rate (Expenses) |
|
|
1.04 |
1.07 |
1.04 |
1.03 |
1.025 |
1.025 |
Expenses |
Previous year exp*Growth rate |
(40.00) |
(41.60) |
(44.512) |
(46.29248) |
(47.681254) |
(48.87329) |
(50.09512) |
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Net Income |
Revenue-Expenses |
15.00 |
14.50 |
13.27 |
13.80 |
14.22 |
14.57 |
14.94 |
Cost of sales(% of revenue) |
Revenue*3% |
(1.65) |
(1.683) |
(1.73349) |
(1.80283) |
(1.856914) |
(1.90334) |
(1.95092) |
Net income (after selling cost) |
Net income - Cost of sales |
13.35 |
12.82 |
11.54 |
12.00 |
12.36 |
12.67 |
12.98 |
Discount rate |
1.09n where n is the year |
1.0900 |
1.1881 |
1.295029 |
1.4115816 |
1.538624 |
1.6771 |
1.828039 |
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Net income/Discount rate |
12.247706 |
10.787812 |
8.909075 |
8.500401 |
8.032489 |
NA |
NA |
Total present value of first 5 years |
|
48.477484 |
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Total present value of first 5 years = 48.477484. Option A
Find the expected
Question 4. Option C
IRR for an investment of $150MM = -23.89%
Options B and D are higher than 9% so focus is placed on options A and C.
Year |
Formula |
1 |
2 |
3 |
4 |
5 |
At -16.96% discount rates are (option A) |
(1-0.1696)n |
0.8304 |
0.6896 |
0.5726 |
0.4755 |
0.3949 |
Present value |
Net income/Discount rate |
16.08 |
18.59 |
20.15 |
25.23 |
31.30 |
Total present values of the 5 years |
|
11.35 |
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At -23.89% discount rates are (Option C) |
=(1-0.2389)n |
0.7611 |
0.5793 |
0.4409 |
0.3356 |
0.2554 |
Present value |
Net income/Discount rate |
17.54 |
22.13 |
26.17 |
35.76 |
48.39 |
Total present values of the 5 years |
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149.99 |
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Therefore, the IRR for an investment of $150MM is -23.98%. Answer is option C
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