Net Present Value Method$-$Annuity

Take a Load Off Hotels is considering the construction of a new hotel for $$105$ million. The expected life of the hotel is $21$ years with no residual value. The hotel is expected to earn revenues of $$21\mathrm{.}6$ million per year. Total expenses, including straight$-$line depreciation, ar$$ expected to be $$8$ million per year. Take a Load Off's management has set a minimum acceptable rate of return of $12\%.$

This information has been collected in the Microsoft Excel Online file. Open the spreadsheet, perform the required analysis, and input your answers in the questions below.

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Open spreadsheet

a$.$ Determine the equal annual net cash flows from operating the hotel. Round your answer to one decimal place.

$ million

b$.$ Calculate the net present value of the new hotel at $12\%$ for $21$ periods. Do not round intermediate calculations. Round to the nearest million dollars. If the net present value is negative, enter the amount using a minus sign. million

c$.$ Which of the following statements is correct regarding this potential project?

a$.$ They should build the hotel because the present value of the hotel's operating cash flows exceeds the construction costs.

b$.$ They should build the hotel because the present value of the hotel's operating cash flows is less than the construction costs.

c$.$ They should build the hotel because the present value of the hotel's operating cash flows is equal to the construction costs.

d$.$ They should not build the hotel because the net present value is negative.