Model 99 Hotels is considering the construction of a new hotel for $80 million. The expected life

Question:

Model 99 Hotels is considering the construction of a new hotel for $80 million. The expected life of the hotel is 20 years with no residual value. The hotel is expected to earn revenues of $15 million per year. Total expenses, including straight-line depreciation, are expected to be $6 million per year. Model 99 management has set a minimum acceptable rate of return of 10%.

a. Determine the equal annual net cash flows from operating the hotel.

b. Calculate the net present value of the new hotel, using the present value factor of an annuity of $1 at 10% for 20 periods of 8.5136. Round to the nearest million dollars.

c. Does your analysis support construction of the new hotel?

Net Present Value
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