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3. The recently opened Grand Hyatt Wailea Resort and Spa on Maui cost $600 million, about $800,000 per room, to build. Daily operating expenses average $135 a room if occupied and $80 a room if unoccupied (much of the labor cost of running a hotel is fixed). At an average room rate of $500 a night, a marginal tax rate of 40%, and a cost of capital of 11%, what year-round occupancy rate do the Japanese investors who financed the Grand Hyatt Wailea require to break even in economic terms on their investment over its estimated 40-year life? What is the likelihood that this investment will have a positive NPV? Assume that the $450 million expense of building the hotel can be written off straight line over a 30-year period (the other $150 million is for the land which is not depreciable) and that the present value of the hotel's terminal value will be $200 million. 4. Conduct a sensitivity analysis for a project with the following characteristics. Each parameter can take on any of three different values but once a parameter value is selected, that value remains constant for the 10-year period. The discount rate is 10% and the project life is 10 years. Ignore taxes and depreciation. 5. A merican Fruit Co, is considering constructing a new plant to process frozen fruit juices One plant would be capital intensive. the other much more labor intensive. Although the final decision would hinge on the relative cost of capital versus labor in the northern 5. A.merican Fruit Co. is considering constructing a new plant to process frozen fruit juices. One plant would be capital intensive, the other much more labor intensive. Although the final decision would hinge on the relative cost of capital versus labor in the northern 5.6 Summary and Conclusions 141 California area, management is curious about the behavior of the plants' return on assets during a typical business cycle. a. Given the following information, calculate the break-even point in units of production for the two plants. b. The economics department has prepared sales projections for three business scenarios: recession, normal, and recovery. Sales under each scenario are expected to be as follows: recession, 300,000 units; normal, 500,000 units; and recovery, 800,000 units. Calculate the return on assets for the two plants under these three scenarios. c. If the three scenarios are all equally likely, what will be the variance of the return on assets for plant 1? For plant 2? What would you advise American Fruit? 6. For the following project, the chief financial officer has prepared a set of certainty. equivalent factors to adjust the cash flows for the estimated risk. The cconomics department has also prepared a set of risk-adjusted interest rates at which to discount the project's cash flow. The 3. The recently opened Grand Hyatt Wailea Resort and Spa on Maui cost $600 million, about $800,000 per room, to build. Daily operating expenses average $135 a room if occupied and $80 a room if unoccupied (much of the labor cost of running a hotel is fixed). At an average room rate of $500 a night, a marginal tax rate of 40%, and a cost of capital of 11%, what year-round occupancy rate do the Japanese investors who financed the Grand Hyatt Wailea require to break even in economic terms on their investment over its estimated 40-year life? What is the likelihood that this investment will have a positive NPV? Assume that the $450 million expense of building the hotel can be written off straight line over a 30-year period (the other $150 million is for the land which is not depreciable) and that the present value of the hotel's terminal value will be $200 million. 4. Conduct a sensitivity analysis for a project with the following characteristics. Each parameter can take on any of three different values but once a parameter value is selected, that value remains constant for the 10-year period. The discount rate is 10% and the project life is 10 years. Ignore taxes and depreciation. 5. A merican Fruit Co, is considering constructing a new plant to process frozen fruit juices One plant would be capital intensive. the other much more labor intensive. Although the final decision would hinge on the relative cost of capital versus labor in the northern 5. A.merican Fruit Co. is considering constructing a new plant to process frozen fruit juices. One plant would be capital intensive, the other much more labor intensive. Although the final decision would hinge on the relative cost of capital versus labor in the northern 5.6 Summary and Conclusions 141 California area, management is curious about the behavior of the plants' return on assets during a typical business cycle. a. Given the following information, calculate the break-even point in units of production for the two plants. b. The economics department has prepared sales projections for three business scenarios: recession, normal, and recovery. Sales under each scenario are expected to be as follows: recession, 300,000 units; normal, 500,000 units; and recovery, 800,000 units. Calculate the return on assets for the two plants under these three scenarios. c. If the three scenarios are all equally likely, what will be the variance of the return on assets for plant 1? For plant 2? What would you advise American Fruit? 6. For the following project, the chief financial officer has prepared a set of certainty. equivalent factors to adjust the cash flows for the estimated risk. The cconomics department has also prepared a set of risk-adjusted interest rates at which to discount the project's cash flow. The