Welcome Inn Hotels is considering the construction of a new hotel for $80 mllion

Question

Welcome Inn Hotels is considering the construction of a new hotel for $80 mllion The expected ife of the hotel i s 10 years with no residual valae. The hotel is expected to earn revenues of $24 malion per year Total expenses per yeac·Wekorne Inn management has set a mitrmm ocoeptable rate of return of 14%.·Amane strotnine recat on. annual net cash flows from operting the hotel. Round to the nearest milion dollars 9% 10% 11% 12% 13% 14% 21.78326 1.75911 1.73554 1.71252 1.69005 1.66810 .64666 2.57710 2.53129 2.48685 2443 2.40183 2.36115 2.3216 4 3.31213 3.23972 316987 3.10245 3.03735 2.97447 91371 >)s3.99271 3.8965 3.79079 3.69590 360478 3.51723 34330 4.62288 4.48502 4.35526 4.23054 .11141 399755 3.88867 20637 5.03235 4.86842 4.7122 4.56376 4.4226 28830 5.74664 5.53482 533493 5.14612 4.96764 4.79677 4 6388 6.246895.99525 5.75902 5.53705 5.32825 5.13166 49463 10 6.71008 6.41766614457 5.88923 5.65022 542624 521612 Net present

Explanation / Answer

Revenues $24 millions

Expenses $16 millions

Depreciation = Cost of asset / estimated life of asset

= $80 millions / 10 years

= $8 millions

Net income = $24 millions - $16 millions

= $8 millions

Cash profit = Net income + depreciation

= $8 + $8

= $16 millions

Net cash flows = $16 millions

Net present value = PV of cash inflows - PV of cash outflows

PV of Cash inflows = $16 millions * 5.21612 (PV of annuity of 14% for 10 years)

= $83.46 millions.

Net present value = $83.46 millions - $80 millions

= $3.46 millions.

Net present value is positive. so it is accepted the project.

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