Question

A hotel company is evaluating a capital project that management forecasts will generate $35,000 each year...

A hotel company is evaluating a capital project that management forecasts will generate $35,000 each year over its six year life. If the required rate of return given the project risks is 10 percent, and the project up front costs are estimated at $150,000, should management go forward with the project? (HINT: calculate the PV of the 6 year cash flows and compare to project's cost.) A or B?

A. Management should approve project as NPV is positive.

B. Management should reject project as NPV is negative.

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Answer #1
Discount rate 10.000%
Year 0 1 2 3 4 5 6
Cash flow stream -150000 35000 35000 35000 35000 35000 35000
Discounting factor 1.000 1.100 1.210 1.331 1.464 1.611 1.772
Discounted cash flows project -150000.000 31818.182 28925.620 26296.018 23905.471 21732.246 19756.588
NPV = Sum of discounted cash flows
NPV Project = 2434.12
Where
Discounting factor = (1 + discount rate)^(Corresponding period in years)
Discounted Cashflow= Cash flow stream/discounting factor
Accept project as NPV is positive
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