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   Net Present Value MethodAnnuity for a Service Company

   Amenity Hotels Inc. is considering the construction of a new hotel for $64 million. The expected life of the hotel is 8 years with no residual value. The hotel is expected to earn revenues of $19 million per year. Total expenses, including depreciation, are expected to be $14 million per year. Amenity Hotels management has set a minimum acceptable rate of return of 10%.

   a. Determine the equal annual net cash flows from operating the hotel. Enter your answer in million. Round your answer to two decimal places. $fill in the blank 1 million

   Present Value of an Annuity of $1 at Compound Interest
   Periods	8%	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	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: $fill in the blank 2 million

   c. Does your analysis support construction of the new hotel?

   YesNoYes

   , because the net present value is

   positivenegativepositive

   .

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   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 8 periods at 10% (Refer Appendix A in the text.). Subtract the initial investment.

   c. Which is more favorablea positive net present value or a negative net present value?

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• eBook

  Show Me How

  Net Present Value MethodAnnuity for a Service Company

  Amenity Hotels Inc. is considering the construction of a new hotel for $64 million. The expected life of the hotel is 8 years with no residual value. The hotel is expected to earn revenues of $19 million per year. Total expenses, including depreciation, are expected to be $14 million per year. Amenity Hotels management has set a minimum acceptable rate of return of 10%.

  a. Determine the equal annual net cash flows from operating the hotel. Enter your answer in million. Round your answer to two decimal places. $fill in the blank 1 million

  Present Value of an Annuity of $1 at Compound Interest
  Periods	8%	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	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: $fill in the blank 2 million

  c. Does your analysis support construction of the new hotel?

  YesNoYes

  , because the net present value is

  positivenegativepositive

  .

  Feedback

  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 8 periods at 10% (Refer Appendix A in the text.). Subtract the initial investment.

  c. Which is more favorablea positive net present value or a negative net present value?

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