Winter Lake Hotels is considering the construction of a new hotel for $150 million. The expected life

Question:

Winter Lake Hotels is considering the construction of a new hotel for $150 million. The expected life of the hotel is 30 years, with no residual value. The hotel is expected to earn revenues of $55 million per year. Total expenses, including depreciation, are expected to be $38 million per year. Winter Lake management has set a minimum acceptable rate of return of 14%.

a. Determine the equal annual net cash flows from operating the hotel.

b. Calculate the net present value of the new hotel, using the present value of an annuity of $1 table found in Appendix A. Round to the nearest million dollars.

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

Net Present Value
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at... Annuity
An annuity is a series of equal payment made at equal intervals during a period of time. In other words annuity is a contract between insurer and insurance company in which insurer make a lump-sum payment or a series of payment and, in return,...