Why Choose Us?
0% AI Guarantee
Human-written only.
24/7 Support
Anytime, anywhere.
Plagiarism Free
100% Original.
Expert Tutors
Masters & PhDs.
100% Confidential
Your privacy matters.
On-Time Delivery
Never miss a deadline.
Holiday Inn is considering either remodelling one of its regional hotels or tearing it down and building a new convention hotel, but because they both would occupy the same physical location, the company can only do one—that is, these are mutually exclusive projects
Holiday Inn is considering either remodelling one of its regional hotels or tearing it down and building a new convention hotel, but because they both would occupy the same physical location, the company can only do one—that is, these are mutually exclusive projects. Both these projects have the same initial outlay of £2,000,000. The first project, since it is a remodel of an existing hotel, has an expected life of 5 years and will provide free cash flows of £540,000 at the end of each year for all 5 years. In addition, this project can be repeated at the end of 5 years at the same cost and with the same set of future cash flows. The proposed new convention hotel has an expected life of 10 years and will produce cash flows of £350,000 per year. The required rate of return on both of these projects is 8 percent. Calculate the NPV using replacement chains to compare these two projects. Which one is preferred project?
Expert Solution
Calculation of NPV using replacement chains
| A | B | C | D | E=[1/(1+r)^n] | F=D*E |
| Year | First Project - Remodelling | Second Project - building a new convention hotel | Incremental Cashflow (B-C) | Discounting Factor @ 8% | Present Value of Incremental Cashflow |
| 0 | $ (2,000,000.00) | $ (2,000,000.00) | $ - | 1 | $ - |
| 1 | $ 540,000.00 | $ 350,000.00 | $ 190,000.00 | 0.9259 | $ 175,925.93 |
| 2 | $ 540,000.00 | $ 350,000.00 | $ 190,000.00 | 0.8573 | $ 162,894.38 |
| 3 | $ 540,000.00 | $ 350,000.00 | $ 190,000.00 | 0.7938 | $ 150,828.13 |
| 4 | $ 540,000.00 | $ 350,000.00 | $ 190,000.00 | 0.7350 | $ 139,655.67 |
| 5 | $ (1,460,000.00) | $ 350,000.00 | $ (1,810,000.00) | 0.6806 | $ (1,231,855.59) |
| 6 | $ 540,000.00 | $ 350,000.00 | $ 190,000.00 | 0.6302 | $ 119,732.23 |
| 7 | $ 540,000.00 | $ 350,000.00 | $ 190,000.00 | 0.5835 | $ 110,863.18 |
| 8 | $ 540,000.00 | $ 350,000.00 | $ 190,000.00 | 0.5403 | $ 102,651.09 |
| 9 | $ 540,000.00 | $ 350,000.00 | $ 190,000.00 | 0.5002 | $ 95,047.30 |
| 10 | $ 540,000.00 | $ 350,000.00 | $ 190,000.00 | 0.4632 | $ 88,006.76 |
NPV = Sum of Present Value of Incremental Cashflow = 175925.93+162894.38+150828.13+139655.67+(1231855.59)+119732.23+110863.18+102651.09+95047.3+88006.76 = $ (86,250.93)
Decision: Second project - building a new convention hotel would be recommended because its NPV is higher than first project.
Archived Solution
You have full access to this solution. To save a copy with all formatting and attachments, use the button below.
For ready-to-submit work, please order a fresh solution below.
