Hotel California, a lovely place along the 101 Highway, last underwent an upgrade in 1969. As a result of its dilapidated conditions, it has plenty of extra rooms. It is considering a major renovation. The construction costs of the renovation are estimated to be $1 million, payable at the end of construction. If the construction starts today, it will last one year. During the renovation, the hotel will be closed to guests (however assume that all of the hotel's expenses, such as paying staff, are unchanged due to long term contracts). Hotel California's capacity is 40 rooms and, on average, 60% of the rooms are vacant on any single day. The daily profit per occupied room is $90. The corporate tax rate is 20%, the appropriate discount rate is 9\% and renovation can be depreciated at 33.3% per year. (a) Compute the average profit per occupied room a year. Then compute the average profit for the hotel as a whole. Assume 365 days per year. (b) Suppose Hotel California decides to begin renovation today. Assume that after renovation, the vacancy rate will fall to 25%. Suppose that the hotel will be sold exactly 3 years after the renovation is complete. Ignore the sales price and everything that happens after the sale and compute the NPV of renovation for cash flows from now until the sale (excluding the sale). Do not forget depreciation and corporate taxes. Assume that Hotel California has enough taxable profit to take advantage of any additional tax breaks due to this construction. Assume no additional capital expenditures are made between the end of renovation and the sale of the hotel.
Hotel California, a lovely place along the 101 Highway, last underwent an upgrade in 1969. As a result of its dilapidated conditions, it has plenty of extra rooms. It is considering a major renovation.
The construction costs of the renovation are estimated to be $1 million, payable at the end of construction. If the construction starts today, it will last one year. During the renovation, the hotel will be closed to guests (however assume that all of the hotel's expenses, such as paying staff, are unchanged due to long term contracts).
Hotel California's capacity is 40 rooms and, on average, 60% of the rooms are vacant on any single day. The daily profit per occupied room is $90.
The corporate tax rate is 20%, the appropriate discount rate is 9\% and renovation can be
(a) Compute the average profit per occupied room a year. Then compute the average profit for the hotel as a whole. Assume 365 days per year.
(b) Suppose Hotel California decides to begin renovation today. Assume that after renovation, the vacancy rate will fall to 25%. Suppose that the hotel will be sold exactly 3 years after the renovation is complete. Ignore the sales price and everything that happens after the sale and compute the NPV of renovation for cash flows from now until the sale (excluding the sale). Do not forget depreciation and corporate taxes. Assume that Hotel California has enough taxable profit to take advantage of any additional tax breaks due to this construction. Assume no additional capital expenditures are made between the end of renovation and the sale of the hotel.
Step by step
Solved in 5 steps with 4 images
