Question

Due at 11:59 PM on November 26 2019 Fall BUS301 Assignment 3 - Capital Budgeting Destination Hotels currently owns an older hotel on the best beachfront property on Lion Head Island, and it is considering either renovating the hotel's original or tearing it down and building a new convention hotel. Neither project is cheat and therefore requires thorough evaluation. It is worth noting that because the physical location can accommodate either the original hotel or a new convention hotel but not both, the company can only choose one project. The initial outlay cash flow and future cash flows for the remodeling project and the build-new project are illustrated by the following timeline (all cash flows in million $): Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 CFO CF1 CF2 CF3 CF5 CF6 Remodeling project: - $300 150 110 50 Build-new project: $600 50 100 CFG 50 100 300 Answer the following questions 1. If the hurdle rate is 9%, calculate the NPV and IRR of the two projects. Decide which project or projects should SIRR Destination should with the remooting Remakl 16.15 15/19% project. Not onk, s it cheaper baut Bld-new 988 both the NPV and the TRR are higher than that of the build-new project 2. If the hurdle rate is 4%, calculate the NPV and IRR of the two projects. Decide which project or projects should be selected and explain why s020 kindl 737 7541% Bild-m 15736 949 WPV TRR 3. Based on your calculations in parts 1 and 2. explain why it would be problematic to use IRR to decide between the two projects.

Answer 1

0 Calculation of IRR Cash flows Year Old New -300 150 50 110 60 -600 150 50 auw N un AwN 50 100 100 300 15% H25 A B C D 1) If hurdle Rate is 9% Calculation of NPV Cash flows PV of Cash Flows Year Old New PVE@9% Old New -300 -600 1 -300 -600 0.9174 137.61 45.87 0.8417 92.59 42.09 100 0.7722 46.33 77.22 100 0.7084 35.42 70.84 0.6499 16.25 194.97 300 0.5963 11.93 178.89 NPV 40.12 9.88 2) If hurdle Rate i5 496 Calculation of NPV Cash flows PV of Cash Flows Year Old New PVF@4% Old New O -300 -600 -300 -600 150 0.9615 144.2 48.08 110 50 0.9246 101.71 46.23 60 100 0.889 53.34 88.90 0.8548 42.74 85.48 300 0.8219 20.55 246.57 300 0.7903 15.81 237.09 78.86 152.85 IRR at any discount rate is same Based on IRR old project is accepted because it has higher Sheet1 Sheet2 Sheet3 50 100 20