The McCall Syndicate owns four resort hotels in Europe. Because the Paris operation (Hotel 1) has been booming over the past five years, management has decided to build an addition to the hotel. This addition will increase the hotel’s capacity by 20 percent. A construction company has bid to build the addition at a cost of $30,000,000. The building will have an increased residual value of $3,000,000.

Daj Van Dyke, the controller, has started an analysis of the net present value for the project. She has calculated the annual net cash inflows by subtracting the increase in cash operating expenses from the increase in case inflows from room rentals. Her partially completed schedule follows:

Year........Net Cash Inflows

1-20 (each year)....$3,900,000

Capital investment projects must generate a 12 percent minimum rate of return to qualify for consideration.

Using net present value analysis, evaluate the proposal and make a recommendation to management. Explain how your recommendation would change if management were willing to accept a 10 percent minimum rate of return. Use Tables 1 and 2 in the appendix on present value tables.