Question

The Road Stop is a national hotel chain with a cost of capital of 12.4 percent. This chain is considering opening a high-end resort that is expected to have a cost of capital that is at least 13 percent. The estimated net present value of the resort project is $500 when discounted at 12.4 percent. The best representation of this situation is that the resort project should:

Answer 1

Answer: probably be put on hold until its cost of capital can be lowered.

Explanation:

Since the Road Stop is a national hotel chain and its cost of capital of 12.4 percent and it is considering the opening a high-end resort that its expected cost of capital will be at least 13 percent.

This shows that the cost of capital of the project is higher than the cost of capital of the hotel. Therefore, in sguvh case, opening the high enee resort isn't worth it as the cost of capital is high and should therefore be put on hold until the cost of capital can be lowered.