Question

Value Lodges owns an economy motel chain and is considering building a new 200-unit motel. The cost to build the motel is estimated at $320,000; Value Lodges estimates furnishings for the motel will cost an additional $620,000 and will require replacement every 5 years. Annual operating and maintenance costs for the motel are estimated to be $140,000. The average rental rate for a unit is anticipated to be $30/day. Value Lodges expects the motel to have a life of 15 years and a salvage value of $900,000 at the end of 15 years. This estimated salvage value assumes that the furnishings are not new. Furnishings have no salvage value at the end of each 5-year replacement interval.

Assuming average daily occupancy percentages of 50%, 60%, 70%, and 80% for years 1 through 4, respectively, and 90% for the 5th through 15th years, a MARR of 6%/year, 365 operating days/year, and ignoring the cost of land, should the motel be built?

Base your decision on an annual worth analysis. AW = ?

(in thousands)

Answer 1