Assume the Townsend Hotel is evaluating whether it should invest $10,000,000 in renovations. The project would increase cash flows from operations for 5 years. The investment will have no salvage value. Townsend uses a 12% hurdle rate. Other information is given below. Decimal point not stated in question

	Year 1	Year 2	Year 3	Year 4	Year 5
Cash inflow from operations (pre-tax)	$ 2,700,000	$ 3,250,000	$3,200,000	$3,500,000	$ 3,500,000
Depreciation on tax return	2,000,000	3,200,000	1,800,000	1,200,000	600,000
Depreciation on financial statements	1,000,000	2,000,000	2,000,000	2,000,000	2,000,000
Net income from investment	1,700,000	1,250,000	1,200,000	1,500,000	1,500,000
PV Factor using 12%

Requirement 1: Input the PV Factors in the above schedule using 12% for years 1-5. These factors can be obtained from the present value tables. (5 points).

Requirement 2: Compute the annual net after-tax cash inflows. We will use the alternative computations described on page 450 where we subtract the cash income tax payments from the cash inflows from operations. To start, we need to compute the annual cash income tax payments which are 30% of the cash inflow from operations less the tax return depreciation. Year 1 is done for you. Complete this schedule (5 points)

	Year 1	Year 2	Year 3	Year 4	Year 5
Cash inflow from operations (pre-tax)	$2,700,000
Depreciation on tax return	(2,000,000)
Taxable income	700,000
Tax rate	30%
Cash payment for income taxes	$210,000

Make sure to show dollar signs on the first and last number of each column and format your numbers with commas and underlines on all schedules.

Now that we know the cash payment for income taxes, we can compute the after-tax cash flows. Complete the schedule below (5 points)

	Year 1	Year 2	Year 3	Year 4	Year 5
Cash inflow from operations
Cash payment for income taxes
After-tax cash flows

Requirement 3:

Compute the net present value and indicate whether it is positive or negative (round amounts to nearest dollar). Complete the schedule below (10 points).

Year	Annual net after-tax cash inflows	PV Factor	Present Value
1
2
3
4
5
	Total present value
	Investment required
	Net positive present value

Requirement 4: Compute the cash payback period. Complete the following schedule. (5 points)

Year	Annual net after-tax cash inflows	Cumulative Cash Payback
1
2
3
4
5

Requirement 5: Compute the average rate of return by completing the schedule below. (5 points)

Annual net income from investment	Year	Amount
	1
	2
	3
	4
	5
	Total
Average annual net income from investments
Average investment
Average rate of return

Requirement 6: Based upon your results for Requirements 3, 4 and 5, would you recommend the Townsend Hotel make this $10,000,000 investment? Explain using complete sentences. (5 points)