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Net Present Value Method-Annuity for a Service Company Welcome Inn Hotels is considering the construction of a new hotel for $63 million. The expected life of the hotel is 8 years with no residual value. The hotel is expected to earn revenues of $19 million per year. Total expenses, including depreciation, are expected to be $13 million per year. Welcome Inn management has set a minimum acceptable rate of return of 11%. Assume straight-line depreciation a. Determine the equal annual net cash flows from operating the hotel. Round to the nearest million dollars. 13.87 x million 10% 13% 14% 0.88496 0.87719 1.66810 1.64666 Present Value of an Annuity of $1 at Compound Interest Periods 8% 9% 11% 12% 1 0.92593 0.91743 0.90909 0.90090 0.89286 2 1.78326 1.75911 1.73554 1.71252 1.69005 3 2.57710 2.53129 2.48685 2.44371 2.40183 4 3.31213 3.23972 3.16987 3.10245 3.03735 5 3.99271 3.88965 3.79079 3.69590 3.60478 6 4.62288 4.48592 4.35526 4.23054 4.11141 7 5.20637 5.03295 4.86842 4.71220 4.56376 2.36115 2.32163 2.91371 2.97447 3.51723 3.43308 3.99755 3.88867 4.42261 4.28830 8 4.96764 4.79677 5.74664 5.53482 5.33493 5.14612 5.53705 4.63886 4.94637 9 6.24689 5.99525 5.75902 5.13166 5.32825 10 6.71008 6.41766 5.21612 6.14457 5.88923 5.65022 5.42624 Net Present Value Method-Annuity for a Service Company Welcome Inn Hotels is considering the construction of a new hotel for $63 million. The expected life of the hotel is 8 years with no residual value. The hotel is expected to earn revenues of $19 million per year. Total expenses, including depreciation, are expected to be $13 million per year. Welcome Inn management has set a minimum acceptable rate of return of 11%. Assume straight-line depreciation. a. Determine the equal annual net cash flows from operating the hotel. Round to the nearest million dollars. 13.88 X million Present Value of an Annuity of $1 at Compound Interest Periods 8% 9% 10% 11% 12% 13% 14% 1 0.92593 0.91743 0.90909 0.89286 0.88496 0.90090 1.71252 2 1.78326 1.75911 1.73554 1.69005 1.66810 3 2.57710 2.53129 2.48685 2.44371 2.40183 3.03735 0.87719 1.64666 2.32163 2.91371 3.43308 4 3.23972 3.16987 3.10245 2.36115 2.97447 3.51723 3.99755 3.31213 3.99271 5 3.88965 3.79079 3.69590 3.60478 6 4.62288 4.48592 4.35526 4.23054 4.11141 3.88867 7 5.20637 5.03295 4.86842 4.71220 4.56376 4.42261 4.28830 8 5.74664 5.14612 4.79677 4.63886 5.53482 5.99525 5.33493 5.75902 4.96764 5.32825 9 6.24689 5.53705 5.13166 4.94637 5.21612 10 6.71008 6.41766 6.14457 5.88923 5.65022 5.42624 b. Calculate the net present value of the new hotel, using the present value of an annuity of $1 table above. Round to the nearest million dollars. If required, use the minus sign to indicate a negative net present value Net present value of hotel project: $ 8.43 X million C. Does your analysis support the purchase of the new hotel? Yes , because the net present value is positive Feedback Check My Work a. Subtract the total expenses less the depreciation expense from the annual revenues. b. Multiply the annual net cash flow (from a) by the present value of an annuity factor for 8 periods at 11% (Appendix A). Subtract the initial investment c. Which is more favorable-a positive net present value or a negative net present value? Learning Objective 3. a b. Calculate the net present value of the new hotel, using the present value of an annuity of $1 table above. Round to the nearest million dollars. If required, use the minus sign to indicate a negative net present value. Net present value of hotel project: 8.38 x million C. Does your analysis support the purchase of the new hotel? Yes , because the net present value is positive Feedback Check My Work a. Subtract the total expenses less the depreciation expense from the annual revenues. b. Multiply the annual net cash flow (from a) by the present value of an annuity factor for 8 periods at 11% (Appendix A), Subtract the initial investment c. Which is more favorable--a positive net present value or a negative net present value? Learning Objective 3. ve