Question
Destination Hotels currently owns an older hotel on the best beachfront property on Hilton Head Island, and it is considering either remodeling the hotel or
Destination Hotels currently owns an older hotel on the best beachfront property on Hilton Head Island, and it is considering either remodeling the hotel or tearing it down and building a new convention hotel, but because both hotels would occupy the same physical location, the company can only choose one projectthat is, these are mutually exclusive projects. Both of these projects have the same initial outlay of $1,400,000. The first project, since it is a remodel of an existing hotel, has an expected life of 8 years and will provide free cash flows of $350.000 at the end of each year for all 8 years. In addition, this project can be repeated at the end of 8 years at the same cost and with the same set of future cash flows. The proposed new convention hotel has an expected life of 16 years and will produce free cash flows of $210,000 per year. The required on both of these projects is 12 percent. Calculate the NV using replacement chains to compare these two projects. The NPV of remodeling the existing hotel is?
The owners of the Laguna Golden Beachfront Hotel are deciding whether they should tear down their current hotel and replace it with a new hotel or simply remodel it. If they decide to tear down the current hotel and rebuild, the initial outlay would be $20,000,000 and the new hotel would generate free cash flows of $7,000,000 at the end of each year for the next 7 years. If they decide to remodel, the cost will $11,000,000 and the hotel will generate free cash flows of $5,000,000 at the end of each year for the next 5 years. If the required rate of return for both projects is 10 percent and both projects can be repeated indefinitely, which project should they choose and what are the projects' equivalent annual annuities (EAAs)?
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