Net Present Value Method—Annuity
Keystone Hotels is considering the construction of a new hotel for $120 million. The expected life of the hotel is 30 years, with no residual value. The hotel is expected to earn revenues of $47 million per year. Total expenses, including depreciation, are expected to be $32 million per year. Keystone management has set a minimum acceptable rate of return of 14%. Assume straight-line depreciation.
a. Determine the equal annual net cash flows from operating the hotel. Round to the nearest million dollars.
$ million
b. Calculate the net present value of the new hotel. Use 7.003 for the present value of an annuity of $1 at 14% for 30 periods. Round to the nearest million dollars.
Net present value of hotel project: $ million
c. Does your analysis support construction of the new hotel?
Select Yes No Item 3