McCall Syndicate owns four resort hotels in Europe. Because the Paris operation (Hotel 1) has been booming over the past five years, management has decided to build an addition to the hotel. This addition will increase the hotel's capacity by 20 percent. A construction company has bid to build the addition at a cost of $30,000,000. The building will have an increased residual value of $3,000,000.
Daj Van Dyke, the controller, has started an analysis of the net present value for the project. She has calculated the annual net cash inflows by subtracting the increase in cash operating expenses from the increase in cash inflows from room rentals. Her partially completed schedule follows:
Year: 120 (each year)
Net Cash Inflows: $3,900,000
Capital investment projects must generate a 12 percent minimum rate of return to qualify for consideration.
Using net present value analysis, evaluate the proposal and make a recommendation to management. Use Table 1 and Table 2.
Should the company invest in the project?
To support your answer, complete the table below. Round amounts to the nearest dollar except for the present value factors which are rounded to three decimal places. Use the minus sign to enter a negative net present value.
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Total present value of cash inflows | | | | | | | |
Less cost of original investment | | | | | | | |
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