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 $8,000,000; Value Lodges estimates furnishings for the motel will cost an additional $700,000 and will replacement every 5 years. Annual operating and maintenance costs for the motel are estimated to be $800,000. The average rental rate for a unit is anticipated to be $40/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. The 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 fifth through fifteenth years, a MARR of 12% per year, 365 opening days per year, and ignoring the cost of land, should the motel be built? Base your decision on the IRR analysis.
(a) Determine the investment's worth
(b) State whether or not your results indicate the investment should be undertaken
(c) State the decision rule you used to arrive at this conclusion.