The owners of a discount motel chain are considering building a new motel. Optim

Question

The owners of a discount motel chain are considering building a new motel. Optimistic, pessimistic, and most likely estimates of several key parameters have been obtained from the local builders and the chamber of commerce. These estimates are shown in the table below. The life of the motel is estimated to be 15 years, and MARR is 20%.

Parameter

Pessimistic

Most Likely

Optimistic

$3,700,000

a. Based only on the pessimistic estimates, is the new motel economically attractive?

Please enter the PW used to reach your decision: $

b. Based only on the most likely estimates, is the new motel economically attractive?

Please enter the PW used to reach your decision: $

c. Based only on the optimistic estimates, is the new motel economically attractive?

Please enter the PW used to reach your decision: $

d. Based on a beta approximation of expected value estimates, is the new motel economically attractive?

Please enter the PW used to reach your decision: $

Carry all interim calculations to 5 decimal places and then round your final answer to the nearest dollar. The tolerance is ±3%.

Parameter

Pessimistic

Most Likely

Optimistic

Initial Cost $10,300,000 $9,075,000 $6,900,000 Annual Operating $390,000 $130,000 $130,000 Annual Revenue $1,300,000 $1,500,000

$3,700,000

Explanation / Answer

a. Pessimistic Years 0 1-15 Initial Investment -10300000 Annual revenues 1300000 Annual operating expenses -390000 Net cash flows -10300000 910000 MARR 20% 20% Discountign factor 1 4.6755 Present Value -10300000 4254705 NPV -6045295 b. Most likely Years 0 1-15 Initial Investment -9075000 Annual revenues 1500000 Annual operating expenses -130000 Net cash flows -9075000 1370000 MARR 20% 20% Discountign factor 1 4.6755 Present Value -9075000 6405435 NPV -2669565 c. Optimistic Years 0 1-15 Initial Investment -6900000 Annual revenues 3700000 Annual operating expenses -390000 Net cash flows -6900000 3310000 MARR 20% 20% Discountign factor 1 4.6755 Present Value -6900000 15475905 NPV 8575905

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