Question

Robertson Resorts is considering whether to expand their Pagosa Springs Lodge. The expansion will create 24 additional rooms for rent. The following estimates are available: Cost of expansion $ 3,130,000 Discount rate 9 % Useful life 20 Annual rental income $ 2,200,000 Annual operating expenses $ 1,750,000

Robertson uses straight-line depreciation and the lodge expansion will have a residual value of $2,760,000. Required: 1. Calculate the annual net operating income from the expansion. 2. Calculate the annual net cash inflow from the expansion. 3. Calculate the ARR. (Round your answer to 2 decimal places.) 4. Calculate the payback period. (Round your answer to 1 decimal place.) 5. Calculate the NPV. (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor(s) from the tables provided. Do not round intermediate calculations. Round your final answer to nearest whole dollar amount.)

Answer 1

Annual depreciation = (3,130,000-2,760,000)/20 = $18,500

1. Annual net operating income = Annual rental income - Annualoperating expense

= 2,200,000-1,750,000 = $450000

2. Annual net cash inflow = Annual net operating income + Depreciation

= $450000+18500 = $468,500

3. ARR = 450000/((3,130,000+2,760,000)/2) = 15.28%

4. Payback period = initial investment /  Annual net cash inflow

= 3,130,000/468,500 = 6.68 years

5. NPV = Present value of cash inflow + Present value of salvage value - initial investment

= 468,500*9.129+2,760,000*0.178-3,130,000

= $1,638,216.5