The owners of a discount motel chain are considering building a new motel. Optim

Question

The owners of a discount motel chain are considering building a new motel. Optimistic, pessimistic, and most likely estimates of several key parameters have been obtained from the local builders and the chamber of commerce. These estimates are shown in the table below. The life of the motel is estimated to be 15 years, and MARR is 20%.

Parameter

Pessimistic

Most Likely

Optimistic

1) Based only on the pessimistic estimates, is the new motel economically attractive? What is the PW used to reach your decision?

2)Based only on the most likely estimates, is the new motel economically attractive? What is the PW used to reach your decision?

4)Based on a beta approximation of expected value estimates, is the new motel economically attractive? What is the PW used to reach your decision?

Parameter

Pessimistic

Most Likely

Optimistic

Initial Cost $11,200,000 $8,575,000 $6,200,000 Annual Operating $305,000 $200,000 $105,000 Annual Revenue $500,000 $1,800,000 $4,100,000

Explanation / Answer

Pessimistic Most Likely Optimistic Annual Income           5,00,000          18,00,000           41,00,000 Annual Operating Expense           3,05,000             2,00,000              1,05,000 Net Annual Cash inflow           1,95,000          16,00,000           39,95,000 PVIFA @ 20% for 15 Years               4.6755                4.6755                 4.6755 PV of Cash Inflows           9,11,717          74,80,756        1,86,78,513 Initial Investment     1,12,00,000          85,75,000           62,00,000 Net Present Value (1,02,88,283)        (10,94,244)        1,24,78,513 Acceptance of Project No No Yes

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