Spiral Galaxy Hotels is considering two different ways to develop a property they bought for $$6\mathrm{.}8$ million last year. The local hotel market sales are $$250$ million annually, and they hope to get $25\%$ of the market if they build a large hotel for $${85}_{?}$ million. Alternatively, they could build a smaller, upscale hotel that would only capture $20\%$ of the market for $$45$ million. The large hotel would have variable costs that are $25\%$ of revenue while the upscale variable costs would be $35\%$ of revenue. The fixed costs are higher for the large hotel at $$8$ million$/$year than the upscale hotel at $$3\mathrm{.}5$ million$/$year$.$ The large hotel requires additional net working capital of $$1\mathrm{.}5$ million while the upscale hotel requires $$0\mathrm{.}9$ million. Both hotels would be depreciated straight$-$line to zero over ten years, at the end of which the land could be sold for $$7\mathrm{.}5$ million. The tax rate is $26\%$ for both projects. Assuming that Spiral Galaxy has a discount rate of $17\%,$ which project should be selected?

Homework:

Complete the capital budgeting problem described above in Excel.

Perform a sensitivity analysis using Excel's Data Table feature showing all of the following relationships for both proposed projects:

a$.$ How sensitive is NPV to changes in both fixed and variable cons?

b$.$ How sensitive is NPV to changes in the discount rate?

c$.$ How sensitive is operating cash flow to changes in market share?

Explain in one or two sentences how you would incorporate these analyses into your assessment of both projects.