Value Lodges owns an economy motel chain and is considering building a new 200-unit motel. The cost to build the motel is estimated at $8,000,000; Value Lodges estimates furnishings for the motel will cost an additional $700,000 and will require replacement every 5 years. Annual operating and maintenance costs for the motel are estimated to be $800,000. The average rental rate for a unit is anticipated to be $40/day. Value Lodges expects the motel to have a life of 15 years and a salvage value of $900,000 at the end of 15 years. This estimated salvage value assumes that the furnishings are not new. Furnishings have no salvage value at the end of each 5- year replacement interval. Assuming average daily occupancy percentages of 50%, 60%, 70%, and 80% for years 1 through 4, respectively, and 90% for the 5th through 15th years, a MARR of 12% / year, 365 operating days/year, and ignoring the cost of land, should the motel be built? Base your decision on an internal rate of return analysis. Build motel? What is the in Yes No te of return used to reach your decision? %

Value Lodges owns an economy motel chain and is considering building a new 200-unit motel. The cost to build the motel is estimated at $8,000,000; Value Lodges estimates furnishings for the motel will cost an additional $700,000 and will require replacement every 5 years. Annual operating and maintenance costs for the motel are estimated to be $800,000. The average rental rate for a unit is anticipated to be $40/day. Value Lodges expects the motel to have a life of 15 years and a salvage value of $900,000 at the end of 15 years. This estimated salvage value assumes that the furnishings are not new. Furnishings have no salvage value at the end of each 5- year replacement interval. Assuming average daily occupancy percentages of 50%, 60%, 70%, and 80% for years 1 through 4, respectively, and 90% for the 5th through 15th years, a MARR of 12% / year, 365 operating days/year, and ignoring the cost of land, should the motel be built? Base your decision on an internal rate of return analysis. Build motel? What is the in Yes No te of return used to reach your decision? %

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

Value Lodges owns an economy motel chain and is considering building a new 200-unit motel. The cost to build the motel is estimated
at $8,000,000; Value Lodges estimates furnishings for the motel will cost an additional $700,000 and will require replacement every 5
years. Annual operating and maintenance costs for the motel are estimated to be $800,000. The average rental rate for a unit is
anticipated to be $40/day. Value Lodges expects the motel to have a life of 15 years and a salvage value of $900,000 at the end of 15
years. This estimated salvage value assumes that the furnishings are not new. Furnishings have no salvage value at the end of each 5-
year replacement interval. Assuming average daily occupancy percentages of 50%, 60%, 70%, and 80% for years 1 through 4,
respectively, and 90% for the 5th through 15th years, a MARR of 12% / year, 365 operating days/year, and ignoring the cost of land,
should the motel be built? Base your decision on an internal rate of return analysis.
Build motel?
Yes
What is the in No
te of return used to reach your decision?
%
Carry all interim calculations to 5 decimal places and then round your final answer to 1 decimal place. The tolerance is ±0.2.

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