Question
Net Present Value MethodAnnuity for a Service Company Welcome Inn Hotels is considering the construction of a new hotel for $90 million. The expected life
Net Present Value MethodAnnuity for a Service Company
Welcome Inn Hotels is considering the construction of a new hotel for $90 million. The expected life of the hotel is 10 years with no residual value. The hotel is expected to earn revenues of $26 million per year. Total expenses, including depreciation, are expected to be $15 million per year. Welcome Inn management has set a minimum acceptable rate of return of 14%. Assume straight-line depreciation.
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 | |||||||
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. Calculate 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: $ million
3)
Net Present Value Method for a Service Company
AM Express Inc. is considering the purchase of an additional delivery vehicle for $34,000 on January 1, 20Y1. The truck is expected to have a five-year life with an expected residual value of $6,000 at the end of five years. The expected additional revenues from the added delivery capacity are anticipated to be $52,000 per year for each of the next five years. A driver will cost $36,000 in 20Y1, with an expected annual salary increase of $3,000 for each year thereafter. The annual operating costs for the truck are estimated to be $2,000 per year.
Present Value of $1 at Compound Interest | |||||
Year | 6% | 10% | 12% | 15% | 20% |
1 | 0.943 | 0.909 | 0.893 | 0.870 | 0.833 |
2 | 0.890 | 0.826 | 0.797 | 0.756 | 0.694 |
3 | 0.840 | 0.751 | 0.712 | 0.658 | 0.579 |
4 | 0.792 | 0.683 | 0.636 | 0.572 | 0.482 |
5 | 0.747 | 0.621 | 0.567 | 0.497 | 0.402 |
6 | 0.705 | 0.564 | 0.507 | 0.432 | 0.335 |
7 | 0.665 | 0.513 | 0.452 | 0.376 | 0.279 |
8 | 0.627 | 0.467 | 0.404 | 0.327 | 0.233 |
9 | 0.592 | 0.424 | 0.361 | 0.284 | 0.194 |
10 | 0.558 | 0.386 | 0.322 | 0.247 | 0.162 |
a. Determine the expected annual net cash flows from the delivery truck investment for 20Y1-20Y5.
Annual Net Cash Flow | |
20Y1 | $ |
20Y2 | $ |
20Y3 | $ |
20Y4 | $ |
20Y5 | $ |
b. Calculate the net present value of the investment, assuming that the minimum desired rate of return is 12%. Use the table of the present value of $1 presented above. When required, round to the nearest dollar. If required, use the minus sign to indicate a negative net present value.
Present value of annual net cash flows | $ |
Investment | $ |
Net present value | $ |
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