Question: please provide the calculation to support your answer! Thanks:) Sean Potter owns and operates a regional chain of motels in the Guelph area and is


Sean Potter owns and operates a regional chain of motels in the Guelph area and is looking to expand into Fergus. He is currently in discussion with two people about buying each of their motels. After reviewing historical financial records, Sean has come up with the following estimates of cash flows for each of these operations: 20 Schlafen Gut Motel Yearly after-tax cash inflow Probability $ 100,000 % 110,000 20 % 140,000 20 % 170,000 20 % 180,000 20 % Bien Dormir Motel Yearly after-tax cash inflow Probability $ 115,000 20 120,000 30 140,000 40 150,000 10 % % Mr.Potter is looking at a 20-year time horizon and will use this time period for decision-making purposes. Either motel can be acquired for $1,200,000. Mr.Po uses a risk-adjusted discount rate when considering investments. His scale is to the coefficient of variation. Coefficient of variation 0 - 0.20 0.21 -0.30 0.31 - 0.40 Over 0.40 Discount rate 8 % 12 % 15 % Not considered % Required: A. Compute the risk-adjusted net present value for each motel: Motel NPV Schlafen Gut Bien Dormir B. Which investment should Mr. Johnson accept if the two investments are mutually exclusive? C. Should Mr. Potter accept both investments if there was no capital rationing
Step by Step Solution
There are 3 Steps involved in it
Get step-by-step solutions from verified subject matter experts
