Net Present Value Method$$Annuity for a Service Company

Welcome Inn Hotels is considering the construction of a new hotel for $$48$ million. The expected life of the hotel is $8$ years with no residual value. The hotel is expected to earn revenues of $$14$ million per year. Total expenses, including depreciation, are expected to be $$10$ million per year. Welcome Inn management has set a minimum acceptable rate of return of $12\%.$ Assume straight$-$line depreciation.

a$.$ Determine the equal annual net cash flows from operating the hotel. Round to the nearest million dollars.

$fill in the blank $1$

million

Present Value of an Annuity of $$1$ at Compound Interest

Periods $8\%9\%10\%11\%12\%13\%14\%$

$10\mathrm{.}925930\mathrm{.}917430\mathrm{.}909090\mathrm{.}900900\mathrm{.}892860\mathrm{.}884960\mathrm{.}87719$

$21\mathrm{.}783261\mathrm{.}759111\mathrm{.}735541\mathrm{.}712521\mathrm{.}690051\mathrm{.}668101\mathrm{.}64666$

$32\mathrm{.}577102\mathrm{.}531292\mathrm{.}486852\mathrm{.}443712\mathrm{.}401832\mathrm{.}361152\mathrm{.}32163$

$43\mathrm{.}312133\mathrm{.}239723\mathrm{.}169873\mathrm{.}102453\mathrm{.}037352\mathrm{.}974472\mathrm{.}91371$

$53\mathrm{.}992713\mathrm{.}889653\mathrm{.}790793\mathrm{.}695903\mathrm{.}604783\mathrm{.}517233\mathrm{.}43308$

$64\mathrm{.}622884\mathrm{.}485924\mathrm{.}355264\mathrm{.}230544\mathrm{.}111413\mathrm{.}997553\mathrm{.}88867$

$75\mathrm{.}206375\mathrm{.}032954\mathrm{.}868424\mathrm{.}712204\mathrm{.}563764\mathrm{.}422614\mathrm{.}28830$

$85\mathrm{.}746645\mathrm{.}534825\mathrm{.}334935\mathrm{.}146124\mathrm{.}967644\mathrm{.}796774\mathrm{.}63886$

$96\mathrm{.}246895\mathrm{.}995255\mathrm{.}759025\mathrm{.}537055\mathrm{.}328255\mathrm{.}131664\mathrm{.}94637$

$106\mathrm{.}710086\mathrm{.}417666\mathrm{.}144575\mathrm{.}889235\mathrm{.}650225\mathrm{.}426245\mathrm{.}21612$

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: $fill in the blank $2$

million

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

$,$ because the net present value is

$.$