The Radiance Hotel upgrades its conference facilities approximately every five years so that it can book larger, more profitable conventions than if it has older décor and technologies.
Managers at Radiance are evaluating a potential conference facilities upgrade plan that would require an initial investment of $3,100,000. Managers want to analyze the upgrade plan using two scenarios, a most likely scenario and a worst-case scenario. Radiance has a 14% hurdle rate for this type of investment.
Scenario #1 is the most likely scenario. If Radiance chooses this upgrade plan, it expects that total revenue will increase by $1,670,000 in Year 1, $1,230,000 in Year 2, $850,000 in Year 3, $575,000 in Year 4, and $250,000 in Year 5. After five years, Radiance expects that it will be able to sell the furniture and fixtures purchased during this facility upgrade for $100,000 and embark on another upgrade.
Scenario #2 is the worst-case scenario. Under the worst-case scenario, Radiance will see total revenue increase by $1,420,000 in Year 1, $984,000 in Year 2, $680,000 in Year 3, $403,000 in Year 4, and $200,000 in Year 5. After five years in this worst-case scenario, Radiance assumes a residual value of zero for the furniture and fixtures from the upgrade.

Requirements
1. For each of the two scenarios that the hotel is analyzing, calculate the
a. Internal rate of return (IRR) after three years
b. Internal rate of return (IRR) after five years
2. Based on your IRR calculations in Requirement 1, would you recommend that the hotel undertake this conference facility upgrade? Why or why not?