Question

Net Present Value Method—Annuity for a Service Company

Amenity Hotels Inc. is considering the construction of a new hotel for $81 million. The expected life of the hotel is 7 years with no residual value. The hotel is expected to earn revenues of $22 million per year. Total expenses, including depreciation, are expected to be $16 million per year. Amenity Hotels’ management has set a minimum acceptable rate of return of 9%.

a. Determine the equal annual net cash flows from operating the hotel. Enter your answer in million. Round your answer to two decimal places.
$ million

Present Value of an Annuity of $1 at Compound Interest
Periods	8%	9%	10%	11%	12%	13%	14%
1	0.92593	0.91743	0.90909	0.90090	0.89286	0.88496	0.87719
2	1.78326	1.75911	1.73554	1.71252	1.69005	1.66810	1.64666
3	2.57710	2.53129	2.48685	2.44371	2.40183	2.36115	2.32163
4	3.31213	3.23972	3.16987	3.10245	3.03735	2.97447	2.91371
5	3.99271	3.88965	3.79079	3.69590	3.60478	3.51723	3.43308
6	4.62288	4.48592	4.35526	4.23054	4.11141	3.99755	3.88867
7	5.20637	5.03295	4.86842	4.71220	4.56376	4.42261	4.28830
8	5.74664	5.53482	5.33493	5.14612	4.96764	4.79677	4.63886
9	6.24689	5.99525	5.75902	5.53705	5.32825	5.13166	4.94637
10	6.71008	6.41766	6.14457	5.88923	5.65022	5.42624	5.21612

b. Compute the net present value of the new hotel, using the present value of an annuity of $1 table above. Round to the nearest million dollars. If required, use the minus sign to indicate a negative net present value.
Net present value of hotel project: $ million

c. Does your analysis support construction of the new hotel?
Yes/No , because the net present value is positive/negative .

Answer 1

	a.)	Determination of equal annual net cash flows from operating the hotel
			Amount in $ Million
		Expected revenue	22.00
		Less: Total expenses	16.00
		Net Profit	6.00
		Add: Depreciation	11.57	(81/7 )
		Equal Annual net cash flow	17.57
	b.)	Net Present Value
			Amount in $ Million
		Present value of annuity of equal annual net cash flow	88.43	(17.57 x 5.03295)
		Less: Initial Investment	81.00
		Net Present Value	7.43
		Net Present value of hotel project is $ 7 Million.
	c.)	Yes, Because the net present value is Positive.