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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Net present value method—annuity for a service company

Welcome Inn Hotels is considering the construction of a new hotel for $90 million. The expected life of the hotel is 30 years, with no residual value. The hotel is expected to earn revenues of $26 million per year. Total expenses, including depredation, are expected to be $15 million per year. Welcome Inn management has set a minimum acceptable rate of return of 14%.

  1. a. Determine the equal annual net cash flows from operating the hotel.
  2. b. Calculate the net present value of the new hotel, using the present value of an annuity of $1table found in Appendix A. Round to the nearest million dollars.
  3. c. Does your analysis support construction of the new hotel? Explain.

a.

To determine

Cash flow:

Cash flow is the monetary consideration (return or income) received by the business for its long-term capital investment.

To determine:  The equal annual net cash flows from operating the hotel.

Explanation

The annual net cash flows from operating the hotel are as follows:

Figure (1)

Working Note for depreciation expenses

AnnualDepreciationExpense}=(Valueof<

b.

To determine

To calculate: The net present value of the hotel using the present value of an annuity of $1 table found in Appendix A.

c.

To determine

To explain: If the analysis supports the construction of the new Hotel.

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