1. The Ritz Carlson has been pursuing a very aggressive growth strategy for the past few years. It is considering two expansion projects for 202 The first project would expand its hotel line, and it would require an initial investment of $7 million. The second project would expand its resort line (a smaller line), and it would require an initial investment of $2 million. The cash flows associated with each project are shown in the table below.

The Ritz Carlson
Year	Project Hotel	Project Resort
0	($7,000,000)	($1,200,000)
1	$1,000,000	$300,000
2	$1,000,000	$300,000
3	$1,000,000	$300,000
4	$2,000,000	$300,000
5	$2,000,000	$300,000
6	$12,000,000	$300,000

The Ritz Carlson would like to use either payback period or NPV to make its capital budgeting decision. It has an acceptable payback period of 5 years, and it will use a 16.00% discount rate for these projects. The projects are not mutually exclusive, The Ritz Carlson will take all projects that benefit shareholders.

1. Define payback period and establish the decision rule for The Ritz Carlson.

2. Calculate payback period for each of the projects (note, you do NOT need to calculate discounted payback for this problem).
3. Which project is acceptable under payback period?

4. Define net present value and establish the decision rule for The Ritz Carlson.

5. Calculate net present value for The Ritz Carlson.

6. Which project is acceptable under NPV?

7. Which capital budgeting technique would you recommend for The Ritz and why?