Net Present Value MethodAnnuity

Take a Load Off Hotels is considering the construction of a new hotel for $24,000,000. The expected life of the hotel is 8 years with no residual value. The hotel is expected to earn revenues of $16,200,000 per year. Total expenses, including straight-line depreciation, are expected to be $15,000,000 per year. Take a Load Off's management has set a minimum acceptable rate of return of 10%.

a. Determine the equal annual net cash flows from operating the hotel. $fill in the blank 1

b. Calculate the net present value of the new hotel, using the present value factor of an annuity of $1 table below. If required, round to the nearest dollar. If the net present value is negative, enter the amount using a minus sign.

Present Value of an Annuity of $1 at Compound Interest
Year	6%	10%	12%	15%	20%
1	0.943	0.909	0.893	0.870	0.833
2	1.833	1.736	1.690	1.626	1.528
3	2.673	2.487	2.402	2.283	2.106
4	3.465	3.170	3.037	2.855	2.589
5	4.212	3.791	3.605	3.353	2.991
6	4.917	4.355	4.111	3.785	3.326
7	5.582	4.868	4.564	4.160	3.605
8	6.210	5.335	4.968	4.487	3.837
9	6.802	5.759	5.328	4.772	4.031
10	7.360	6.145	5.650	5.019	4.192

Annual net cash flow	$fill in the blank 2
Present value of annual hotel project cash flows	$fill in the blank 3
Less hotel construction costs	fill in the blank 4
Net present value of hotel project	$fill in the blank 5

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

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

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

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

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

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