Chapter 11 Homework (Application) Net Present Value Method-Annuity for a Service Company Welcome Inn Hotels is considering the construction of a new hotel for $60 million. The expected life of the hotel is 19 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. Welcome Inn management has set a minimum acceptable rate of return of 12%. Assume straight-line depreciation. a. Determine the equal annual net cash flows from operating the hotel. Round to the nearest million dollars. million 13% 14% 0.88496 0.87719 1.66810 1.64666 2.32163 2.36115 2.97442 2.91371 Present Value of an Annuity of $1 at Compound Interest Periods 8% 9% 10% 11% 12% 1 0.92593 0.91743 0.90909 0.90090 0.89286 2 1.78326 1.75911 1.73554 1.71252 1.69005 3 2.57710 2.53129 2.48685 2.44371 2.40183 4 3.31213 3,23972 3.16987 3.10245 3.03735 5 3.99271 3.88965 3.79079 3.69590 3.60478 6 4.62288 4.48592 4.35526 4.23054 4.11141 7 5.20637 5.03295 4.86842 4.71220 4.56376 8 5.74664 5.53482 5.33493 5.14612 4.96764 9 6.24689 5.99525 5.75902 5.53705 5.32825 10 6.71008 6.41766 6.14457 5.88923 5.65022 3,51723 3.43308 3.99755 3.88867 4.28830 4.42261 4.79677 4.63886 5.13166 4.94637 5.42624 5.21512 b. Calculate 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! million Previous Next Check My Work Chapter 1 Homework (Application) 5 3.99271 3.88965 3.79079 3.60478 3.51723 6 4.62288 3.69590 4.23054 4.48592 4.35526 4.11141 3.99755 3.43308 3.88867 7 5.20637 5.03295 4.71220 4.56376 8 4.86842 5.33493 5.74664 5.53482 5.99525 5.14612 4.42261 4.79677 4.28830 4.63886 9 6.24689 4.96764 5.32825 5.75902 5.53705 5.13166 10 6.71008 4.94637 6.41766 6.14457 5.88923 5.65022 5.42624 5.21612 b. Calculate 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: million c. Does your analysis support the purchase of the new hotel? Yes because the net present value is positive