1. Welcome Inn Hotels is considering the construction of a new hotel for $81 million. The expected life of the hotel is 8 years with no residual value. The hotel is expected to earn revenues of $25 million per year. Total expenses, including depreciation, are expected to be $18 million per year. Welcome Inn management has set a minimum acceptable rate of return of 12%. Assume straight-line depreciation.

a. Determine the equal annual net cash flows from operating the hotel. Round to the nearest million dollars. $ million

Present Value of an Annuity of $1 at Compound Interest
Periods	8%	9%	10%	11%	12%	13%	14%
1	0.92593	0.91743	0.90909	0.90090	0.89286	0.88496	0.87719
2	1.78326	1.75911	1.73554	1.71252	1.69005	1.66810	1.64666
3	2.57710	2.53129	2.48685	2.44371	2.40183	2.36115	2.32163
4	3.31213	3.23972	3.16987	3.10245	3.03735	2.97447	2.91371
5	3.99271	3.88965	3.79079	3.69590	3.60478	3.51723	3.43308
6	4.62288	4.48592	4.35526	4.23054	4.11141	3.99755	3.88867
7	5.20637	5.03295	4.86842	4.71220	4.56376	4.42261	4.28830
8	5.74664	5.53482	5.33493	5.14612	4.96764	4.79677	4.63886
9	6.24689	5.99525	5.75902	5.53705	5.32825	5.13166	4.94637
10	6.71008	6.41766	6.14457	5.88923	5.65022	5.42624	5.21612

b. Calculate the net present value of the new hotel using the present value of an annuity of $1 table above. Round to the nearest million dollars. If required, use the minus sign to indicate a negative net present value. Net present value of hotel project: $______ million

2. Keystone Healthcare Corp. is proposing to spend $77,588 on a seven-year project that has estimated net cash flows of $17,000 for each of the seven years.

Present Value of an Annuity of $1 at Compound Interest
Year	6%	10%	12%	15%	20%
1	0.943	0.909	0.893	0.870	0.833
2	1.833	1.736	1.690	1.626	1.528
3	2.673	2.487	2.402	2.283	2.106
4	3.465	3.170	3.037	2.855	2.589
5	4.212	3.791	3.605	3.352	2.991
6	4.917	4.355	4.111	3.784	3.326
7	5.582	4.868	4.564	4.160	3.605
8	6.210	5.335	4.968	4.487	3.837
9	6.802	5.759	5.328	4.772	4.031
10	7.360	6.145	5.650	5.019	4.192

a. Compute the net present value, using a rate of return of 15%. Use the table of present value of an annuity of $1 presented above. If required, round to the nearest dollar. Use the minus sign to indicate a negative net present value.

Present value of annual net cash flows	$
Less amount to be invested	$
Net present value	$

b. Based on the analysis prepared in part (a), is the rate of return (1) more than 15%, (2) 15%, or (3) less than 15%?

c. Determine the internal rate of return by computing a present value factor for an annuity of $1 and using the table of the present value of an annuity of $1 presented above. %

3.

The following data are accumulated by Paxton Company in evaluating the purchase of $153,500 of equipment, having a four-year useful life:

	Net Income		Net Cash Flow
Year 1	$39,000		$66,000
Year 2	24,000		51,000
Year 3	11,000		38,000
Year 4	(1,000)		26,000

Present Value of $1 at Compound Interest
Year	6%	10%	12%	15%	20%
1	0.943	0.909	0.893	0.870	0.833
2	0.890	0.826	0.797	0.756	0.694
3	0.840	0.751	0.712	0.658	0.579
4	0.792	0.683	0.636	0.572	0.482
5	0.747	0.621	0.567	0.497	0.402
6	0.705	0.564	0.507	0.432	0.335
7	0.665	0.513	0.452	0.376	0.279
8	0.627	0.467	0.404	0.327	0.233
9	0.592	0.424	0.361	0.284	0.194
10	0.558	0.386	0.322	0.247	0.162

a. Assuming that the desired rate of return is 15%, determine the net present value for the proposal. Use the table of the present value of $1 presented above. If required, round to the nearest dollar. If required, use the minus sign to indicate a negative net present value.

Present value of net cash flow	$
Amount to be invested	$
Net present value	$

b. Would management be likely to look with favor on the proposal? The net present value indicates that the return on the proposal is than the minimum desired rate of return of 15%.

4. Natures Way Inc. is planning to invest in new manufacturing equipment to make a new garden tool. The garden tool is expected to generate additional annual sales of 7,700 units at $32 each. The new manufacturing equipment will cost $100,100 and is expected to have a 10-year life and $7,700 residual value. Selling expenses related to the new product are expected to be 4% of sales revenue. The cost to manufacture the product includes the following on a per-unit basis:

Direct labor		$5.4
Direct materials		17.9
Fixed factory overhead-depreciation		1.2
Variable factory overhead		2.7
	Total	$27.2

Determine the net cash flows for the first year of the project, Years 29, and for the last year of the project. Use the minus sign to indicate cash outflows. Do not round your intermediate calculations but, if required, round your final answer to the nearest dollar.

Natures Way Inc.
Net Cash Flows
	Year 1	Years 2-9	Last Year
Initial investment
Operating cash flows:
Annual revenues	$	$	$
Selling expenses
Cost to manufacture
Net operating cash flows	$	$	$
Total for Year 1	$
Total for Years 2-9		$
Residual value
Total for last year			$