The owner of Pinnacle Golf Hotel, Zenith plc, has a dilemma. The company wishes to sell the hotel but believes it would be worth a lot more, given its location, if it were first upgraded from three to four-star. This would require a major investment programme which would cause some disruption.

The Pinnacle Golf has 38 double bedrooms, which are occupied 245 nights per year on average and for which the charge is 125 per room per night. However, during the refurbishment, however long it takes, the occupancy rate is expected to fall to 195 nights per year on average due to rooms being out of action. The hotels operating costs are 950,000 pa, and these will be unaffected. Assume both income and costs occur at year-ends.

The refurbishment will take between two and three years and will cost a total of 800,000. When this is paid depends on how long the work takes, in the following way.

Payments at end of year	Duration of Work
(000)	2 years	3 years
1	400	267.67
2	400	267.67
3	-	267.67

Zenith plc could sell the hotel now as a three-star for 950,000. It expects to be able to sell it as a four-star for 2.5m, but this decision means that it loses the 950,000 now. Its cost of capital is estimated to be 17% pa. Ignore inflation and taxation.

(a) Construct a cash flow forecast and calculate the net present value (NPV) of the decision to invest, assuming that the refurbishment takes three years. Advise Zenith plc whether they should sell now or invest and sell after three years. (8 Marks)

(b) On further investigation, the construction company about to be awarded the contract estimates that there is an 70% chance that the work will take two years and a 30% chance that it will take three years. Determine the NPV of the decision to invest in light of this new information.

(c) Suppose Zenith plc decides not to invest but is contemplating keeping Pinnacle Golf after all as a three-star for a further 8 years, after which it would only be worth 550,000. Determine the Net Present Value of the hotel on this basis and advise whether Zenith plc should sell, refurbish, and then sell or keep the hotel. (6 Marks)

(d) State with reasons whether you would sell, or refurbish and then sell, or keep the hotel, in the above case.