Net Present Value MethodAnnuity for a Service Company

Amenity Hotels Inc. is considering the construction of a new hotel for $80 million. The expected life of the hotel is 10 years with no residual value. The hotel is expected to earn revenues of $24 million per year. Total expenses, including depreciation, are expected to be $16 million per year. Amenity Hotels management has set a minimum acceptable rate of return of 14%.

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 InterestPeriods8%9%10%11%12%13%14%10.925930.917430.909090.900900.892860.884960.8771921.783261.759111.735541.712521.690051.668101.6466632.577102.531292.486852.443712.401832.361152.3216343.312133.239723.169873.102453.037352.974472.9137153.992713.889653.790793.695903.604783.517233.4330864.622884.485924.355264.230544.111413.997553.8886775.206375.032954.868424.712204.563764.422614.2883085.746645.534825.334935.146124.967644.796774.6388696.246895.995255.759025.537055.328255.131664.94637106.710086.417666.144575.889235.650225.426245.21612

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? Yes , because the net present value is positive .