A nationwide motel chain is considering locating a new motel in Bigtown, USA. The cost of building a 160-room motel (excluding furnishings) is $5.4 million. The firm uses a 15-year planning horizon to evaluate investments of this type. The fumishings for this motel must be replaced every five years at an estimated cost of $1,875,000 (at k = 0, 5, and 10). The old furnishings have no market value. Annual operating and maintenance expenses for the facility are estimated to be $135,000. The market value of the motel after 15 years is estimated to be 25% of the original building cost. Rooms at the motel are projected to be rented a an average rate of $45 per night. On the average, the motel will rent 65% of its rooms each night. Assume the motel will be open 365 days per year. MARR is 8% per year. a. Using an annual-worth measure of merit, is the project economically attractive?

A nationwide motel chain is considering locating a new motel in Bigtown, USA. The cost of building a 160-room motel (excluding furnishings) is $5.4 million. The firm uses a 15-year planning horizon to evaluate investments of this type. The fumishings for this motel must be replaced every five years at an estimated cost of $1,875,000 (at k = 0, 5, and 10). The old furnishings have no market value. Annual operating and maintenance expenses for the facility are estimated to be $135,000. The market value of the motel after 15 years is estimated to be 25% of the original building cost. Rooms at the motel are projected to be rented a an average rate of $45 per night. On the average, the motel will rent 65% of its rooms each night. Assume the motel will be open 365 days per year. MARR is 8% per year. a. Using an annual-worth measure of merit, is the project economically attractive?

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)

14th Edition

ISBN:9781305506381

Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Chapter17: Long-term Investment Analysis

Section: Chapter Questions

Problem 3E

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