Stay-In-Style (SIS) Hotels Inc. is considering the construction of a new hotel for $80 million. The expected life of the hotel is 5 years with no residual value. The hotel is expected to earn revenues of $21 million per year. Total expenses, including depreciation, are expected to be $16 million per year. Stay-In-Style Hotels management has set a minimum acceptable rate of return of 8%.

a. Determine the equal annual net cash flows from operating the hotel. Enter your answer in million. Round your answer to two decimal places. 21million

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. Compute the net present value of the new hotel, using the present value of an annuity of $1 table above. Round to the nearest million dollars. If required, use the minus sign to indicate a negative net present value. Net present value of hotel project: fill in the blank 1 of 1$

Incorrect

million

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

YesNoYes

, because the net present value is

positivenegativepositive

.

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a. Subtract the total expenses less the depreciation expense from the annual revenues.

b. Multiply the annual net cash flow (from a) by the present value of an annuity factor for 5 periods at 8% (Refer Appendix A in the text.). Subtract the initial investment.

c. Which is more favorablea positive net present value or a negative net present value?