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Stay in style hotels is considering the construction of a new hotel for $63 million. The expected life of the hotel is 8 years with no residual value. The hotel is expected to earn revenues of $19 million per year. Total expenses, including depreciation, are expected to be $13 million per year. Stay in style hotel management has set a minimum acceptable rate of return of 11%.

A. Determine the equal annual net cash flows from operating the hotel. Enter your answer in million. Round your answer to two decimal places.

B. Compute the net present value of the new hotel, using the present value of an annuity of $1 table above. Round to the nearest million dollars.

For a. Subtract the total expenses less the depreciation expense from the annual revenues. B. Multiply the annual net cash flow (from a) by the present value of an annuity factor for 8 periods at 11% (refer to the chart) subtract the initial investment

Let's break down the problem step by step:

### Part A: Determine the annual net cash flows
We need to calculate the **annual net cash flows** by subtracting the non-cash expenses (depreciation) from total expenses and then subtracting the resulting cash expenses from revenue.

**Given:**
- Revenue per year: \$19 million
- Total expenses per year: \$13 million
- Initial investment: \$63 million
- Life: 8 years
- Depreciation (straight-line): Initial investment / Useful life

Depreciation expense:
\[
\text{Depreciation} = \frac{\$63 \, \text{million}}{8} = 7.875 \, \text{million}
\]

Cash expenses (excluding depreciation) are calculated by subtracting the depreciation from the total expenses:
\[
\text{Cash expenses} = 13 \, \text{million} - 7.875 \, \text{million} = 5.125 \, \text{million}
\]

Now, we can compute the annual net cash flow:
\[
\text{Annual Net Cash Flow} = \text{Revenue} - \text{Cash Expenses} = 19 \, \text{million} - 5.125 \, \text{million} = 13.875 \, \text{million}
\]

### Part B: Compute the Net Present Value (NPV)

**Step 1: Identify the annuity factor from the table**

We need to use the **present value of an annuity factor** for 8 periods at 11%. From the table, for 8 periods at 11%, the factor is **5.14612**.

**Step 2: Calculate the NPV**

To find the NPV, we multiply the annual net cash flow by the annuity factor, then subtract the initial investment:
\[
\text{NPV} = (13.875 \, \text{million} \times 5.14612) - 63 \, \text{million}
\]

Now, let's calculate this:The **Net Present Value (NPV)** of the new hotel project is approximately **$8.4 million**.

### Summary:
- **A. Annual Net Cash Flow**: \$13.88 million
- **B. NPV**: \$8.4 million

Do you need further clarification on any step or more details?

Here are five related questions to deepen your understanding:
1. How is depreciation accounted for in cash flow calculations?
2. What happens to the NPV if the minimum acceptable rate of return changes to 10%?
3. How would an increase in expenses impact the NPV calculation?
4. What is the significance of a positive NPV in investment decisions?
5. How does the life of the asset (8 years) affect the present value calculation?

**Tip**: Always compare the NPV against the initial investment to determine if a project is financially viable. If NPV > 0, the project adds value.

Stay in style hotels is considering the construction of a new hotel for $63 million. The expected life of the hotel is 8 years with no residual value. The hotel is expected to earn revenues of $19 million per year. Total expenses, including depreciation, are expected to be $13 million per year. Stay in style hotel management has set a minimum acceptable rate of return of 11%. A. Determine the equal annual net cash flows from operating the hotel. B. Compute the net present value of the new hotel, using the present value of an annuity of $1 table.

Calculate the net present value (NPV) of a hotel construction project with an initial investment of $63 million, annual revenues of $19 million, and expenses of $13 million over 8 years using the present value of an annuity of $1 table. Learn step-by-step how to determine the NPV and cash flow using an 11% discount rate.

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