Net present value methodannuity for a service company

Stay-In-Style (SIS) Hotels Inc. is considering the construction of a new hotel for $30 million. The expected life of the hotel is 10 years, with no residual value. The hotel is expected to earn revenues of $25 million per year. Total expenses, including straight-line depreciation, are expected to be $20 million per year. Stay-In-Style Hotels management has set a minimum acceptable rate of return of 20%.

a. Determine the equal annual net cash flows from operating the hotel. Round to the nearest million dollars. $______ million

Present Value of an Annuity of $1 at Compound Interest

Year	6%	10%	12%	15%	20%
1	0.943	0.909	0.893	0.870	0.833
2	1.833	1.736	1.690	1.626	1.528
3	2.673	2.487	2.402	2.283	2.106
4	3.465	3.170	3.037	2.855	2.589
5	4.212	3.791	3.605	3.353	2.991
6	4.917	4.355	4.111	3.785	3.326
7	5.582	4.868	4.564	4.160	3.605
8	6.210	5.335	4.968	4.487	3.837
9	6.802	5.759	5.328	4.772	4.031
10	7.360	6.145	5.650	5.019	4.192

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. Net present value of hotel project?:

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

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