Question: Destination Hotels currently owns an older hotel on the best
Destination Hotels currently owns an older hotel on the best beach-front property on Hilton Head Island, and it is considering either remodeling the hotel or tearing it down and building a new convention hotel, but because they both would occupy the same physical location, the company can only do one— that is, these are mutually exclusive projects. Both these projects have the same initial outlay of $ 1,000,000. The first project, since it is a remodel of an existing hotel, has an expected life of 8 years and will provide free cash flows of $ 250,000 at the end of each year for all 8 years. In addition, this project can be repeated at the end of 8 years at the same cost and with the same set of future cash flows. The proposed new convention hotel has an expected life of 16 years and will produce cash flows of $ 175,000 per year. The required rate of return on both of these projects is 10 percent. Calculate the NPV using replacement chains to compare these two projects.
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