Calculate the hotel’s present value, net present value, and IRR.

First, look at the present value of this project. We know from chapter 7 that the present value of a project is the current value of a cash-flowing asset based on the amount and timing of its projected cash flows, which, in this case, include the terminal selling price for year 3 calculated in question 1.

Now we need to discount the cash flows for years 1 through 3 and add them to determine the present value of the investment.

To calculate present value, you need the number of compounding periods [N], interest rate [I/Y], and future value [PV]. The following chart presents the inputs needed to calculate present value for years 1 through 3:

Year Compounding Periods Interest Rate Future Value Present Value

[N] [I/Y] [FV] [CPT] [PV]

1 1 12% $250,000 $223,214 2 2 12% $500,000 $398,597 3 3 12% $8,250,000 $5,872,187 After computing the present value for each year, simply add the present value calculations; the total equals $6,493,998.

The next step is to calculate net present value. In this case, there are two ways to compute the answer.

Because we know that net present value is the present value of an asset less the asset’s initial cost, you can simply subtract $5,000,000 (the cost of acquisition and renovation/conversion of the project)

from the calculated present value of $6,493,998 to reach the answer of $1,493,998. You can also calculate the NPV by entering the cash flows, including the initial acquisition and renovation/conversion expense, as a negative at time zero, along with the discount rate of 12%, into your calculator or Excel spreadsheet. You should arrive at the same answer of $1,493,998.

The third part of the question requires you to compute the internal rate of return (IRR) for this project.

If you already input the cash flows while calculating NPV, you are a step ahead. If not, enter the cash flows into your calculator or Excel spreadsheet, as seen below:

Year Cash Flow 0 $5,000,000 1 $250,000 2 $500,000 3 $8,250,000 Now, all you have to do is compute the IRR by utilizing the functions on either your calculator or Excel spreadsheet. In either case, the internal rate of return should be 22.72%.