Net Present Value MethodAnnuity for a Service Company

Outside Inn Hotels is considering the construction of a new hotel for $120 million. The expected life of the hotel is 30 years, with no residual value. The hotel is expected to earn revenues of $35 million per year. Total expenses, including depreciation, are expected to be $20 million per year. Outside Inn management has set a minimum acceptable rate of return of 14%. Assume straight-line depreciation.

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
11	7.13896	6.80519	6.49506	6.20652	5.93770	5.68694	5.45273
12	7.53608	7.16073	6.81369	6.49236	6.19437	5.91765	5.66029
13	7.90378	7.48690	7.10336	6.74987	6.42355	6.12181	5.84236
14	8.22424	7.78615	7.36669	6.96187	6.62817	6.30249	6.00207
15	8.55948	8.06069	7.60608	7.19087	6.81086	6.46238	6.14217
16	8.85137	8.31256	7.82371	7.37916	6.97399	6.60388	6.26506
17	9.12164	8.54363	8.02155	7.54879	7.11963	6.72909	6.37286
18	9.37189	8.75563	8.20141	7.70162	7.24967	6.83991	6.46742
19	9.60360	8.95011	8.36492	7.83929	7.36578	6.93797	6.55037
20	9.81815	9.12855	8.51356	7.96333	7.46944	7.02475	6.62313
21	10.01680	9.29224	8.64869	8.07507	7.56200	7.10155	6.68696
22	10.20074	9.44243	8.77154	8.17574	7.64465	7.16951	6.74294
23	10.37106	9.58021	8.88322	8.26643	7.71843	7.22966	6.79206
24	10.52876	9.70661	8.98474	8.34814	7.78432	7.28288	6.83514
25	10.67478	9.82258	9.07704	8.42174	7.84314	7.32998	6.87293
26	10.80998	9.92897	9.16095	8.48806	7.89566	7.37167	6.90608
27	10.93516	10.02658	9.23722	8.54780	7.94255	7.40856	6.93515
28	11.05108	10.11613	9.30657	8.60162	7.98442	7.44120	6.96066
29	11.15841	10.19828	9.36961	8.65011	8.02181	7.47009	6.98304
30	11.25778	10.27365	9.42691	8.69379	8.05518	7.49565	7.00266

a. Determine the equal annual net cash flows from operating the hotel. Round to the nearest million dollars. $fill in the blank 1 million

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? , because the net present value is .