Welcome Inn Hotels is considering the construction of a new hotel for $90 million. The expected life of the hotel is 30 years, with no residual value. The hotel is expected to earn revenues of $26 million per year. Total expenses, including depreciation, are expected to be $15 million per year. Welcome Inn management has set a minimum acceptable rate of return of 14%. a. Determine the equal annual net cash flows from operating the hotel. Round to the nearest million dollars.

Question

Business

Frederick Stone

21 July, 04:56

Welcome Inn Hotels is considering the construction of a new hotel for $90 million. The expected life of the hotel is 30 years, with no residual value. The hotel is expected to earn revenues of $26 million per year. Total expenses, including depreciation, are expected to be $15 million per year. Welcome Inn management has set a minimum acceptable rate of return of 14%. a. Determine the equal annual net cash flows from operating the hotel. Round to the nearest million dollars.

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Nayeli Burgess · Answer 1

Annual net cash flow from operating the hotel = $14 million per year

Explanation:

As per the data given in the question,

Annual net cash flow = Net income after tax + Depreciation

Depreciation = (Cost of the investment - Salvage value) : Useful life

= ($90 million - 0) : 30 years

= $3 million per year

Annual net cash flow = ($26 million - $15 million) + $3 million

= $14 million per year