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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883

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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883
Textbook Problem

Net present value method—annuity

Model 99 Hotels is considering the construction of a new hotel for $80 million. The expected life of the hotel is 20 years with no residual value. The hotel is expected to earnrevenues of $15 million per year. Total expenses.including straight-line depreciation. Areexpected to he $6 million per year. Model 99 management has set a minimum acceptablerate of return of 10%.

a. Determine the equal annual net cash flows from operating the hotel.

b. Calculate the net present value of the new hotel, using the present value factor of an annuity of $1 at 10% for 20 periods of 8.5136. Round to the nearest million dollars.

c. Does your analysis support construction of the new hotel?

To determine

(a)

Concept Introduction:

Cash flow statement is a very important part of the financial statement of all company. Cash flow balance always equal to net cash as like cash received in the business minus cash paid during the year i.e. the difference between the cash inflow and the cash outflow.

To find out:

The equal annual net cash flows from operating the hotel.

Explanation

Equal annual cash flow means cash flow as equal to present value of initial investment.

Therefore, equal annual cash flow is computed as per the provided information.

Present value factor for 10 years at 12% is 6.145

Total cost of construction is $80<

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