Question
After converting his office building in Montreal into a restaurant, Matthew found an even more lucrative investment to cater to luxury travel for politicians. He
After converting his office building in Montreal into a restaurant, Matthew found an even more lucrative investment to cater to luxury travel for politicians. He read in the Toronto Sun that the Canadian delegation to the Queens funeral paid out a kings ransom for hotel rooms when the total bill at Londons Corinthia hotel rang up at 281,400 pounds or $356,981.70 in Canadian dollars. Included in the detailed bill was a charge of 4,800 pounds per night for the River Suite with a view of the Thames and complimentary butler service, or $6,000 a night in Canadian dollars paid by taxpayers. Matthew is therefore considering cashing in more stock options and Pfizer shares to convert an office building he owns in Ottawa into a luxury hotel called the Athenia with numerous 1,000 sq ft suites with a view of the Rideau Canal costing $6,000 Canadian dollars a night, which, at that price, comes with complimentary butler and chauffeur service. First, Matthew has to dispose of old office equipment he bought at a capital cost of $2 million 10 years ago. When purchased, this old office equipment had an expected life of 25 years, at which time it was expected to have a salvage value of $200,000. The furniture and masonry for the Athenia together has a capital cost of $10 million dollars and an expected life of 15 years, with a salvage value of $1,000,000. Surprisingly, both the old office equipment and furniture and masonry belong to CCA asset class 8. Revenue Canada requires that assets in this asset class be written off using the declining balance method at a CCA rate of 20%. The Athenia hotel is expected to generate increased pre-tax profits for Matthew of $2.4 million per year for 15 years after which Matthew will sell the building when the real estate bubble returns to Canada. No changes in net working capital requirements are expected. Currently the old office equipment could be sold for $400,000. Matthews tax rate is 40% and he requires a rate of return of 15% to cover the opportunity cost of his Pfiz
Suppose the pre-tax profit increase (from office building to hotel) is only $1.9 million in the first year. adjust the formulas to find the NPV break-even growth rate g of the pre-tax profit increase (using a growing annuity of revenues formula for present value of revenues). P
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