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

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question

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)

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Present value

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

 

 

 

 

 

 

 

 

 

 

 

 

Total present value of first 5 years = 48.477484. Option A

Find the expected IRR if you invest $150 mi in this hotel today. This cannot be higher than 9% as any IRR higher than 9% will bring the NPV to below $48.477484.

 

 

 

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

 

 

 

 

 

 

 

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

 

149.99

 

 

 

 

 

 

 

 

Therefore, the IRR for an investment of $150MM is -23.98%. Answer is option C

Question 3
The following situation will be used in questions 3, 4 and 5. A hotel is projected to have $ 55
mi in total revenues during the following year. Total expenses are projected to be $ 40 mi. 3%
of the total revenue is allocated as capital reserves. In the next four years, the annual growth
rates in total revenues and total expenses will be (2%, 3%, 4%, 3%) and (4%, 7%, 4%, 3%)
respectively. In the following years, revenues and total expenses will stabilize at a constant
rate of 2.5%. The market discount rate on such assets is estimated at 9%(after all
adjustments). Going out cap rate is 7.5% (after all adjustments). Cost of sales is usually 3%.
Assume no additional costs (brokerage etc.) at the time of the purchase. Your investment
horizon is 5 years. What is the estimated hotel value today?
O a. $ 48,477,484
$ 154,961,520
$ 162,515,008
O b.
Oc.
O d. $ 224,901,389
Question 4
On the basis of the data provided at question 3, what is your expected IRR if you invest $ 150
mi in this hotel today?
a. -16.96%
O b.
9.83%
C.
-23.89%
O d.
11.02%
O O
Transcribed Image Text:Question 3 The following situation will be used in questions 3, 4 and 5. A hotel is projected to have $ 55 mi in total revenues during the following year. Total expenses are projected to be $ 40 mi. 3% of the total revenue is allocated as capital reserves. In the next four years, the annual growth rates in total revenues and total expenses will be (2%, 3%, 4%, 3%) and (4%, 7%, 4%, 3%) respectively. In the following years, revenues and total expenses will stabilize at a constant rate of 2.5%. The market discount rate on such assets is estimated at 9%(after all adjustments). Going out cap rate is 7.5% (after all adjustments). Cost of sales is usually 3%. Assume no additional costs (brokerage etc.) at the time of the purchase. Your investment horizon is 5 years. What is the estimated hotel value today? O a. $ 48,477,484 $ 154,961,520 $ 162,515,008 O b. Oc. O d. $ 224,901,389 Question 4 On the basis of the data provided at question 3, what is your expected IRR if you invest $ 150 mi in this hotel today? a. -16.96% O b. 9.83% C. -23.89% O d. 11.02% O O
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
O. $4,961,520
O d. -$ 911,158
Transcribed Image Text: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 O. $4,961,520 O d. -$ 911,158
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