Question

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.

Answer 1

Answer:

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