10.

Net Present Value MethodAnnuity for a Service Company

Welcome Inn Hotels is considering the construction of a new hotel for $90 million. The expected life of the hotel is 30 years, with no residual value. The hotel is expected to earn revenues of $26 million per year. Total expenses, including depreciation, are expected to be $15 million per year. Welcome Inn management has set a minimum acceptable rate of return of 14%.

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

b. Calculate the net present value of the new hotel. Use 7.003 for the present value of an annuity of $1 at 14% for 30 periods. Round to the nearest million dollars.

Net present value of hotel project: $ million

c. Does your analysis support construction of the new hotel? , because the net present value is .