EX $24-9$ Net present value method$-$annuity for a service company

Obj. $3$

a$.$ $$8$ million

Stay$-$In$-$Style $($SIS$)$ Hotels Inc. is considering the construction of a new hotel for $$30$ million. The expected life of the hotel is $10$ years, with no residual value. The hotel is expected to earn revenues of $$25$ million per year. Total expenses, including straight$-$line depreciation, are expected to be $$20$ million per year. Stay$-$In$-$Style Hotels' management has set a minimum acceptable rate of return of $20\%.$

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

b$.$ Compute the net present value of the new hotel, using the present value of an annuity table found in Exhibit $5.$ Round to the nearest million dollars.

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