Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

A nationwide motel chain is considering locating a new motel in Bigtown, USA. The cost of building a 150-room motel (excluding furnishings) is $5 million.

image text in transcribed

A nationwide motel chain is considering locating a new motel in Bigtown, USA. The cost of building a 150-room motel (excluding furnishings) is $5 million. The firm uses a 15-year planning horizon to evaluate investments of this type. The furnishings for this motel must be replaced every five years at an estimated cost of $1,875,000 (at k=0, 5, and 10). The old furnishings have no market value. Annual operating and maintenance expenses for the facility are estimated to be $125,000 The market value of the motel after 15 years is estimated to be 20% of the original building cost Rooms at the motel are projected to be rented at an average rate of $45 per night. On the average, the motel will rent 60% of its rooms each night. Assume the motel will be open 365 days per year. MARR is 10% per year a. Using an annual-worth measure of merit, is the project economically attractive? b. Investigate sensitivity to decision reversal for the following three factors: (1) capital investment, (2) MARR, and (3) occupancy rate (average percent of rooms rented per night). To which of these factors is the decision most sensitive? Assume that the market value remains constant at the amount used in part a. c. Graphically investigate the sensitivity of the AW to changes in the above three factors. Investigate changes over the interval 40%. On your graph use percent change as the x-axis and AW as the y-axis Click the icon to view the interest and annuity table for discrete compounding when the MARR is 10% per year a. Calculate the AW value for the project. AW(1096) $1 thousand (Round to one decimal place.) A nationwide motel chain is considering locating a new motel in Bigtown, USA. The cost of building a 150-room motel (excluding furnishings) is $5 million. The firm uses a 15-year planning horizon to evaluate investments of this type. The furnishings for this motel must be replaced every five years at an estimated cost of $1,875,000 (at k=0, 5, and 10). The old furnishings have no market value. Annual operating and maintenance expenses for the facility are estimated to be $125,000 The market value of the motel after 15 years is estimated to be 20% of the original building cost Rooms at the motel are projected to be rented at an average rate of $45 per night. On the average, the motel will rent 60% of its rooms each night. Assume the motel will be open 365 days per year. MARR is 10% per year a. Using an annual-worth measure of merit, is the project economically attractive? b. Investigate sensitivity to decision reversal for the following three factors: (1) capital investment, (2) MARR, and (3) occupancy rate (average percent of rooms rented per night). To which of these factors is the decision most sensitive? Assume that the market value remains constant at the amount used in part a. c. Graphically investigate the sensitivity of the AW to changes in the above three factors. Investigate changes over the interval 40%. On your graph use percent change as the x-axis and AW as the y-axis Click the icon to view the interest and annuity table for discrete compounding when the MARR is 10% per year a. Calculate the AW value for the project. AW(1096) $1 thousand (Round to one decimal place.)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Case Studies In Finance

Authors: Robert Bruner, Kenneth Eades, Michael Schill

6th Edition

0073382450, 978-0073382456

More Books

Students also viewed these Finance questions