Question

College is considering building a new student residence. The construction cost of a 125-room residence (excluding...

College is considering building a new student residence. The construction cost of a 125-room residence (excluding furniture) is $5,000,000. The College uses a 15 year planning horizon to evaluate investments of this type. The furnishings for this residence must be replaced every five years, at an estimated cost of $2,000,000 (i.e., at n=0, at n=5, and n=10). The old furniture has no salvage value. Annual operating and maintenance expenses for the new building are estimated to be $125,000. The College can sell the building after 15 years at 20% of the original construction cost.

Rooms at the residence will be rented for $45 per day. On the average the occupancy is expected to be 80% per year. Assume the residence will operate 300 days per year. MARR = 10%

INSTRUCTIONS

  1. Ignoring both income and disposal taxes, use Excel to calculate the Annual Worth, to determine if the project is economically feasible.
  2. Determine the project's break-even points, for the following two factors, considering each one separately. (i.e., calculate the percentage change in each of the following two factors, considered one at a time, that would cause the project NPV to become zero).Hint:Consider using Goal Seek
    • Initial Capital Investment; i.e., building cost only.
    • Occupancy rate; i.e., the average percent of rented rooms per year.
  3. Prepare a table showing the project's Annual Worth, corresponding to changes in each of the two factors specified above, over an interval of plus/minus 20% for each factor from a base of 0%.
  4. What can you conclude from the analysis? i.e., which of the two factors is the project profitability more sensitive to? Why?
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Answer #1
Inputs
1.Initial cap.Inv. -5000000
2.Room occup. Rate 80%
Year 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
3.Initial cap.Inv. -5000000
4.Cost of Furnishings -2000000 -2000000 -2000000
5.Sale value of Build. 1000000
6.Room rent revenue(125 rooms*Row 2*$ 45/day*300 days) 1350000 1350000 1350000 1350000 1350000 1350000 1350000 1350000 1350000 1350000 1350000 1350000 1350000 1350000 1350000
7.Annual O&M exp. -125000 -125000 -125000 -125000 -125000 -125000 -125000 -125000 -125000 -125000 -125000 -125000 -125000 -125000 -125000
8.Total annual cash flows(sum 3--7) -7000000 1225000 1225000 1225000 1225000 -775000 1225000 1225000 1225000 1225000 -775000 1225000 1225000 1225000 1225000 2225000
9.PV F at 10%(1/1.10^Yr.n) 1 0.909091 0.826446 0.751315 0.683013 0.620921 0.564474 0.513158118 0.466507 0.424098 0.385543 0.350494 0.318631 0.28966 0.26333 0.23939
10.PV at 10%(8*9) -7000000 1113636 1012397 920360.6 836691.5 -481214 691480.6 628618.6948 571471.5 519519.6 -298796 429355 390322.8 354839 322581 532647
11.NPV (sum of Row 10) 543910.22
12.Annual worth=NPV/(Annuity Factor)
ie. 543910.22/((1-1.1^-15)/0.10)=
Annual Worth= 71509.93
Project is economically feasible, as both its NPV & Annual Worth are POSITIVE
Using Goal Seek,foll. Results have been observed:
Base case % Change
BEP- Construction cost 5571261 5000000 (5571261-5000000)/5000000= 11.43%
BEP- Occ. Rate 76% 80% (76%-80%)/80%= -5.00%
Annual worth Const.cost Sensitivity Occ. Rate Sensitivity
Base case 71510 71510
Plus 20% -53669 (-53669-71510)/71510= -175.05% 341510 (341510-71510)/71510= 377.57%
Minus 20% 196689 (196689-71510)/71510= 175.05% -198490 (-198490-71510)/71510= -377.57%
Conclusion:Project profitability is more sensitive to changes in occupancy rate
as rooom rent revenue is dependent on that.
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