Please only answer practice question 5Solution for question 3 & 4 below:Question 3. Option AYearFormula1234567Growth rate (Revenue) 1.021.031.041.031.0251.025RevenuePrevious year rev* growth rate55.0056.1057.7860.0961.9063.4465.03Growth rate (Expenses) 1.041.071.041.031.0251.025ExpensesPrevious year exp*Growth rate(40.00)(41.60)(44.512)(46.29248)(47.681254)(48.87329)(50.09512) Net IncomeRevenue-Expenses15.0014.5013.2713.8014.2214.5714.94Cost of sales(% of revenue)Revenue*3%(1.65)(1.683)(1.73349)(1.80283)(1.856914)(1.90334)(1.95092)Net income (after selling cost)Net income - Cost of sales13.3512.8211.5412.0012.3612.6712.98Discount rate1.09n where n is the year1.09001.18811.2950291.41158161.5386241.67711.828039 Present valueNet income/Discount rate12.24770610.7878128.9090758.5004018.032489NANATotal present value of first 5 years 48.477484 Total present value of first 5 years = 48.477484. Option AFind the expected IRR if you invest $150 mi in this hotel today. This cannot be higher than 9% as any IRR higher than 9% will bring the NPV to below $48.477484. Question 4. Option CIRR for an investment of $150MM = -23.89%Options B and D are higher than 9% so focus is placed on options A and C.YearFormula12345At -16.96% discount rates are (option A)(1-0.1696)n0.83040.68960.57260.47550.3949Present valueNet income/Discount rate16.0818.5920.1525.2331.30Total present values of the 5 years 11.35 At -23.89% discount rates are (Option C)=(1-0.2389)n0.76110.57930.44090.33560.2554Present valueNet income/Discount rate17.5422.1326.1735.7648.39Total present values of the 5 years 149.99 Therefore, the IRR for an investment of $150MM is -23.98%. Answer is option C Question 5On the basis of the data provided at question 3, what is your expected NPV if you invest $150 mi in this hotel today? Consider your WACC to be 10%.O a. -$ 1,002,273O b. $1,002,273O. $4,961,520O d. -$ 911,158 Question 3The following situation will be used in questions 3, 4 and 5. A hotel is projected to have $ 55mi in total revenues during the following year. Total expenses are projected to be $ 40 mi. 3%of the total revenue is allocated as capital reserves. In the next four years, the annual growthrates in total revenues and total expenses will be (2%, 3%, 4%, 3%) and (4%, 7%, 4%, 3%)respectively. In the following years, revenues and total expenses will stabilize at a constantrate of 2.5%. The market discount rate on such assets is estimated at 9%(after alladjustments). Going out cap rate is 7.5% (after all adjustments). Cost of sales is usually 3%.Assume no additional costs (brokerage etc.) at the time of the purchase. Your investmenthorizon is 5 years. What is the estimated hotel value today?O a. $ 48,477,484$ 154,961,520$ 162,515,008O b.Oc.O d. $ 224,901,389Question 4On the basis of the data provided at question 3, what is your expected IRR if you invest $ 150mi in this hotel today?a. -16.96%O b.9.83%C.-23.89%O d.11.02%O O

The Net Present Value: The net present value, or NPV as it's popularly known, is a capital budgeting…

Answered: On the basis of the data provided at…

PFIN (with PFIN Online, 1 term (6 months) Printed Access Card) (New, Engaging Titles from 4LTR Press)

6th Edition

ISBN:9781337117005

Author:Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk

Publisher:Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk

Chapter2: Using Financial Statements And Budgets

Section: Chapter Questions

Problem 5FPE

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Question

Please only answer practice question 5

Solution for question 3 & 4 below:

Question 3. Option A

Year	Formula	1	2	3	4	5	6	7
Growth rate (Revenue)			1.02	1.03	1.04	1.03	1.025	1.025
Revenue	Previous year rev* growth rate	55.00	56.10	57.78	60.09	61.90	63.44	65.03
Growth rate (Expenses)			1.04	1.07	1.04	1.03	1.025	1.025
Expenses	Previous year exp*Growth rate	(40.00)	(41.60)	(44.512)	(46.29248)	(47.681254)	(48.87329)	(50.09512)

Net Income	Revenue-Expenses	15.00	14.50	13.27	13.80	14.22	14.57	14.94
Cost of sales(% of revenue)	Revenue*3%	(1.65)	(1.683)	(1.73349)	(1.80283)	(1.856914)	(1.90334)	(1.95092)
Net income (after selling cost)	Net income - Cost of sales	13.35	12.82	11.54	12.00	12.36	12.67	12.98
Discount rate	1.09ⁿ where n is the year	1.0900	1.1881	1.295029	1.4115816	1.538624	1.6771	1.828039

Present value	Net income/Discount rate	12.247706	10.787812	8.909075	8.500401	8.032489	NA	NA
Total present value of first 5 years		48.477484

Total present value of first 5 years = 48.477484. Option A

Find the expected IRR if you invest $150 mi in this hotel today. This cannot be higher than 9% as any IRR higher than 9% will bring the NPV to below $48.477484.

Question 4. Option C

IRR for an investment of $150MM = -23.89%

Options B and D are higher than 9% so focus is placed on options A and C.

Year	Formula	1	2	3	4	5
At -16.96% discount rates are (option A)	(1-0.1696)ⁿ	0.8304	0.6896	0.5726	0.4755	0.3949
Present value	Net income/Discount rate	16.08	18.59	20.15	25.23	31.30
Total present values of the 5 years		11.35

At -23.89% discount rates are (Option C)	=(1-0.2389)ⁿ	0.7611	0.5793	0.4409	0.3356	0.2554
Present value	Net income/Discount rate	17.54	22.13	26.17	35.76	48.39
Total present values of the 5 years		149.99

Therefore, the IRR for an investment of $150MM is -23.98%. Answer is option C

Question 5
On the basis of the data provided at question 3, what is your expected NPV if you invest $
150 mi in this hotel today? Consider your WACC to be 10%.
O a. -$ 1,002,273
O b. $1,002,273
O. $4,961,520
O d. -$ 911,158

Question 3
The following situation will be used in questions 3, 4 and 5. A hotel is projected to have $ 55
mi in total revenues during the following year. Total expenses are projected to be $ 40 mi. 3%
of the total revenue is allocated as capital reserves. In the next four years, the annual growth
rates in total revenues and total expenses will be (2%, 3%, 4%, 3%) and (4%, 7%, 4%, 3%)
respectively. In the following years, revenues and total expenses will stabilize at a constant
rate of 2.5%. The market discount rate on such assets is estimated at 9%(after all
adjustments). Going out cap rate is 7.5% (after all adjustments). Cost of sales is usually 3%.
Assume no additional costs (brokerage etc.) at the time of the purchase. Your investment
horizon is 5 years. What is the estimated hotel value today?
O a. $ 48,477,484
$ 154,961,520
$ 162,515,008
O b.
Oc.
O d. $ 224,901,389
Question 4
On the basis of the data provided at question 3, what is your expected IRR if you invest $ 150
mi in this hotel today?
a. -16.96%
O b.
9.83%
C.
-23.89%
O d.
11.02%
O O

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