Welcome Inn Hotels is considering the construction of a new hotel for $56 million. The expected life of the hotel is 8 years with no residual value. The hotel is expected to earn revenues of $17 million per year. Total expenses, including depreciation, are expected to be $11 million per year. Welcome Inn management has set a minimum acceptable rate of return of 12%. Assume straight-line depreciation. a. Determine the equal annual net cash flows from operating the hotel. Round to the nearest million dollars. 13 v million Present Value of an Annuity of $1 at Compound Interest Periods 8% 9% 10% 11% 12% 13% 14% 1 0.92593 0.91743 0.90909 0.90090 0.89286 0.88496 0.87719 2 1.78326 1.75911 1.73554 1.71252 1.69005 1.66810 1.64666 2.57710 2.53129 2.48685 2.44371 2.40183 2.36115 2.32163 3.31213 3.23972 3.16987 3.10245 3.03735 2.97447 2.91371 3.99271 3.88965 3.79079 3.69590 3.60478 3.51723 3.43308 4.62288 4.48592 4.35526 4.23054 4.11141 3.99755 3.88867 7 5.20637 5.03295 4.86842 4.71220 4.56376 4.42261 4.28830 5.74664 5.53482 5.33493 5.14612 4.96764 4.79677 4.63886 6.24689 5.99525 5.75902 5.53705 5.32825 5.13166 4.94637 10 6.71008 6.41766 6.14457 5.88923 5.65022 5.42624 5.21612 b. Calculate the net present value of the new hotel using the present value of an annuity of $1 table above. Round to the nearest million dollars. If required, use the
Welcome Inn Hotels is considering the construction of a new hotel for $56 million. The expected life of the hotel is 8 years with no residual value. The hotel is expected to earn revenues of $17 million per year. Total expenses, including depreciation, are expected to be $11 million per year. Welcome Inn management has set a minimum acceptable rate of return of 12%. Assume straight-line depreciation. a. Determine the equal annual net cash flows from operating the hotel. Round to the nearest million dollars. 13 v million Present Value of an Annuity of $1 at Compound Interest Periods 8% 9% 10% 11% 12% 13% 14% 1 0.92593 0.91743 0.90909 0.90090 0.89286 0.88496 0.87719 2 1.78326 1.75911 1.73554 1.71252 1.69005 1.66810 1.64666 2.57710 2.53129 2.48685 2.44371 2.40183 2.36115 2.32163 3.31213 3.23972 3.16987 3.10245 3.03735 2.97447 2.91371 3.99271 3.88965 3.79079 3.69590 3.60478 3.51723 3.43308 4.62288 4.48592 4.35526 4.23054 4.11141 3.99755 3.88867 7 5.20637 5.03295 4.86842 4.71220 4.56376 4.42261 4.28830 5.74664 5.53482 5.33493 5.14612 4.96764 4.79677 4.63886 6.24689 5.99525 5.75902 5.53705 5.32825 5.13166 4.94637 10 6.71008 6.41766 6.14457 5.88923 5.65022 5.42624 5.21612 b. Calculate the net present value of the new hotel using the present value of an annuity of $1 table above. Round to the nearest million dollars. If required, use the
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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Transcribed Image Text:Net Present Value Method-Annuity for a Service Company
Welcome Inn Hotels is considering the construction of a new hotel for $56 million. The expected life of the hotel is 8 years with no residual value. The hotel is expected to
earn revenues of $17 million per year. Total expenses, including depreciation, are expected to be $11 million per year. Welcome Inn management has set a minimum
acceptable rate of return of 12%. Assume straight-line depreciation.
a. Determine the equal annual net cash flows from operating the hotel. Round to the nearest million dollars.
13 v million
Present Value of an Annuity of $1 at Compound Interest
Periods
8%
9%
10%
11%
12%
13%
14%
1
0.92593
0.91743
0.90909
0.90090
0.89286
0.88496
0.87719
2
1.78326
1.75911
1.73554
1.71252
1.69005
1.66810
1.64666
3
2.57710
2.53129
2.48685
2.44371
2.40183
2.36115
2.32163
4
3.31213
3.23972
3.16987
3.10245
3.03735
2.97447
2.91371
3.99271
3.88965
3.79079
3.69590
3.60478
3.51723
3.43308
6
4.62288
4.48592
4.35526
4.23054
4.11141
3.99755
3.88867
7
5.20637
5.03295
4.86842
4.71220
4.56376
4.42261
4.28830
8
5.74664
5.53482
5.33493
5.14612
4.96764
4.79677
4.63886
6.24689
5.99525
5.75902
5.53705
5.32825
5.13166
4.94637
10
6.71008
6.41766
6.14457
5.88923
5.65022
5.42624
5.21612
b. Calculate the net present value of the new hotel using the present value of an annuity of $1 table above. Round to the nearest million dollars. If required, use the
Transcribed Image Text:b. Calculate the net present value of the new hotel using the present value of an annuity of $1 table above. Round to the nearest million dollars. If required, use the
minus sign to indicate a negative net present value.
Net present value of hotel project: $ 17.4528€ X million
c. Does your analysis support the purchase of the new hotel?
Yes v
because the net present value is positive v
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