The Last Chance Hotel Corporation is currently planning to build one new hotel. It is evaluating two alternatives and has estimated the following information:

First Chance Second Chance Total initial investment $2,000,000 $1,000,000 Annual operating revenue $ 900,000 $ 485,000 Annual operating expense $ 235,000 $ 100,000 Expected salvage value $ 0 $ 0 Tax rate 40% 40%

Last Chance’s financial manager estimates that both hotels have betas of 1.25 and will have leverage ratios of 40%. The cost of debt (kp) is 12.5%, the return on the market portfolio is 18%, and the risk-free rate is 10%. Last Chance uses straight-line depreciation and the WACC approach to NPV for all its project analyses.

Required:

1. Calculate the k; for each hotel.

2. Calculate the k, for each hotel.

3. The annual after-tax operating cash flow for the First Chance alternative is $479,000. Calculate the annual after-tax operating cash flow for the Second Chance alternative.

4. The NPV of the Second Chance alternative is $360,000. Calculate the NPV of the First Chance alternative.