Rasta Resorts, Inc., is planning to develop some beachfront land on an eastern Caribbean is¬ land. Plan A is to build a hotel-casino for short-stay guests (up to one week), whereas plan B is to build condominiums for a clientele who would typically stay longer than one week. The hotel- casino would need to be lavishly appointed with luxury rooms, and the condominiums would optimally be somewhat more spartan. Thus there is a substantial difference in the initial cost. Plan A will cost SEC20 million (Eastern Caribbean dollars) before a single guest arrives, whereas plan B will cost only $EC6 million. Revenues from the hotel-casino are likely to be four times those from the condominiums, and operating costs of the hotel-casino are likely to be only twice those of the condominiums. Rasta Resorts personnel tell you that the hotel-casino will reach payback in five years, whereas the condominiums will reach payback in three years (in nominal terms in both cases). The resale value of these resorts, once payback is reached, will be SEC30 million for the hotel-casino and SEC10 million for the condominiums, regardless of when they are sold after payback, because of the inevitable physical depreciation of the build¬ ings.

(a) Assuming year-end cash flows, a time horizon of five years, and opportunity discount rates of 20 percent and 15 percent for the hotel-casino and the condominiums, respectively, calcu¬ late the expected present value of each plan.

(b) Would your answer be different if the time horizon was 10 years?

(c) Advise Rasta Resorts on this decision, making explicit all underlying assumptions and res¬ ervations you might have.