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 $ 5,000,000 Discount rate 8 % Useful life 20 Annual rental income $ 1,250,000 Annual operating expenses $ 800,000 Robertson uses straight-line depreciation and the lodge expansion will have a residual value of $2,000,000. 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. 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

1) annual net operating income
annual rental income	1250000
less: annual operating expenses	800000
annual net operating income	450000
2) net cash inflow from expansion
annual net operating income	450000
add: depreciation (5000000-2000000)/20	150000
net cash inflow	600000

3) ARR = annual net income/average investment

ARR = 450000/(5000000/2) = 18%

4) Payback period = cost of expansion/annual cash inflow

payback period = 5000000/600000 = 8.33 Years

5) Net present value = present value of cash inflow-cost

present value of cash inflow = (600000*9.8181) = 5890860

present value of cash inflow 20th year = (2000000*0.2145) = 429000

total present value of cash inflow = (5890860+429000) = 6319860

Net present value = 6319860-5000000 = 1319860