The recently opened Grand Hyatt Wailea Resort and Spa on Maui cost $600mill abou

Question

The recently opened Grand Hyatt Wailea Resort and Spa on Maui cost $600mill about $800,000 per room, to build. Daily operating expenses average $135 a room if occupied and $80 a room if unoccupied (much of the labor cost of running a hotel is fixed) at an average room rate of $500 a night. A marginal tax of 40%, and a cost of capital of 11%, what year round occupancy rate do the Japanese investors who financed the Grand Hyatt Wailea require to break even in economic terms on their investment over its estimated 40 yr. life? What is the likelihood that this investment will have a positive NPV? Assume that the $450 million expense of building the hotel can be written off straight line over a 30yr period (the other$150 million is for the land which is not depreciable) and that the present value of the hotels terminal value will be $200million

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Explanation / Answer

Investopedia explains 'Net Present Value - NPV'

NPV compares the value of a dollar today to the value of that same dollar in the future, taking inflation and returns into account. If the NPV of a prospective project is positive, it should be accepted. However, if NPV is negative, the project should probably be rejected because cash flows will also be negative.

For example, if a retail clothing business wants to purchase an existing store, it would first estimate the future cash flows that store would generate, and then discount those cash flows into one lump-sum present value amount, say $565,000. If the owner of the store was willing to sell his business for less than $565,000, the purchasing company would likely accept the offer as it presents a positive NPV investment. Conversely, if the owner would not sell for less than $565,000, the purchaser would not buy the store, as the investment would present a negative NPV at that time and would, therefore, reduce the overall value of the clothing company.

The difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyze the profitability of an investment or project.

NPV analysis is sensitive to the reliability of future cash inflows that an investment or project will yield.

Formula:

Net Present Value (NPV)

In addition to the formula, net present value can often be calculated using tables, and spreadsheets such as Microsoft Excel.

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