Net Present Value MethodAnnuity

Take a Load Off Hotels is considering the construction of a new hotel for $14,700,000. The expected life of the hotel is 7 years with no residual value. The hotel is expected to earn revenues of $13,104,000 per year. Total expenses, including straight-line depreciation, are expected to be $10,500,000 per year. Take a Load Off's management has set a minimum acceptable rate of return of 20%.

a. Determine the equal annual net cash flows from operating the hotel.

$____

b. Calculate the net present value of the new hotel, using the present value factor of an annuity of $1 table below. If required, round to the nearest dollar. If the net present value is negative, enter the amount using a minus sign.

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

Annual net cash flow $________

Present value of annual hotel project cash flows $________

Less hotel construction costs _________

Net present value of hotel project $________

c. Which of the following statements is correct regarding this potential project?

- They should build the hotel because the present value of the hotel's operating cash flows exceeds the construction costs.

- They should build the hotel because the present value of the hotel's operating cash flows is less than the construction costs.

- They should build the hotel because the present value of the hotel's operating cash flows is equal to the construction costs.

- They should not build the hotel because the net present value is negative.