Question
The owners of the Laguna Golden Beachfront Hotel are deciding whether they should tear down their current hotel and replace it with a new hotel
The owners of the Laguna Golden Beachfront Hotel are deciding whether they should tear down their current hotel and replace it with a new hotel or simply remodel it. If they decide to tear down the current hotel and rebuild, the initial outlay would be $21 000 000 and the new hotel would generate cash flows of $6 500 000 at the end of each year for the next 7 years. If they decide to remodel, the cost will $12 000000 and the hotel will generate cash flows of $6 000 000 at the end of each year for the next 4 years. If the required rate of return for both projects is 6 percent and both projects can be repeated indefinitely, which project should they choose and what are the projects' equivalent annual annuities (EAAs )?
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