Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Amenity Hotels Inc. is considering the construction of a new hotel for $60 million. The expected life of the hotel is 9 years with no

image text in transcribedimage text in transcribed

Amenity Hotels Inc. is considering the construction of a new hotel for $60 million. The expected life of the hotel is 9 years with no residual value. The hotel is expected to earn revenues of $18 million per year. Total expenses, including depreciation, are expected to be $12 million per year. Amenity Hotels' management has set a minimum acceptable rate of return of 13%. a. Determine the equal annual net cash flows from operating the hotel. Enter your answer in million. Round your answer to two decimal places. 12.7 x million SI Present Value of an Annuity of $1 at Compound Interest Periods 8% 9% 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 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. Compute 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: s 65.17 X million C. Does your analysis support construction of the new hotel? Yes , because the net present value is positive Feedback Check My Work a. Subtract the total expenses less the depreciation expense from the annual revenues. b. Multiply the annual net cash flow (from a) by the present value of an annuity factor for 9 periods at 13% (Refer Appendix A in the text.). Subtract the initial investment. C. Which is more favorable-a positive net present value or a negative net present value

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

Frank Woods Business Accounting An Introduction To Financial Accounting

Authors: Alan Sangster, Lewis Gordon, Frank Wood

15th Edition

1292365439, 9781292365435

More Books

Students also viewed these Accounting questions

Question

What do you like to do for fun/to relax?

Answered: 1 week ago