A newly constructed 30-floor hotel if opened now (time =0) could begin to yield an annual...
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A newly constructed 30-floor hotel if opened now (time =0) could begin to yield an annual rental income of 6m from year 0. Alternatively, the building could be extended by one extra floor being added at a cost of 19m incurred in year 0, though this would mean that the hotel would be unoccupied in year 0 and all revenues for that year would be lost. The revenue from the extra floor would amount to 1.5m per year in all years 1 to 20 after which the building will be worthless. (i) In terms of the decision to construct the extra floor, sketch a time line (years 0 to 20) of the cash flows. (ii) Show with clear workings that the internal rate of return of adding the extra floor is between 1% and 2%. You may use the tables provided. A newly constructed 30-floor hotel if opened now (time =0) could begin to yield an annual rental income of 6m from year 0. Alternatively, the building could be extended by one extra floor being added at a cost of 19m incurred in year 0, though this would mean that the hotel would be unoccupied in year 0 and all revenues for that year would be lost. The revenue from the extra floor would amount to 1.5m per year in all years 1 to 20 after which the building will be worthless. (i) In terms of the decision to construct the extra floor, sketch a time line (years 0 to 20) of the cash flows. (ii) Show with clear workings that the internal rate of return of adding the extra floor is between 1% and 2%. You may use the tables provided.
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