Reference no: EM133003054

Hotel Group is considering the refurbishment of their Executive Suites  within each of their Brisbane CBD hotel chains. These extensive renovations are expected to attract a greater number of high-net-worth travellers, while only marginally increasing annual expenses. The project will require an initial investment of $5.2 million in total and is planned to be fully depreciated over a 15-year period. The firm's marginal tax rate is 30%.

Hotel Group currently secures an average of 825 bookings per annum, with travellers typically spending roughly $940 per visit. Operating expenses currently average $397,085 per annum. The project is anticipated to slightly increase Hotel Group's average number of bookings to 985 per annum, while considerably increasing traveller spending to $1,680 per visit. Operating expenses are projected to increase to $476,500 per annum. The firm anticipates they will scrap certain furniture at the end of the project for $85,000 in total.

Hotel Group's cost of capital for evaluation purposes is 8.5% per annum, with management preferring a payback period of 9 years or less on similar risk projects.

Required:

a) Calculate the projects' after-tax net operating cash flows for years 1 through to 15.

b) Calculate the project's after-tax termination cash flow in year 15.

c) Evaluate whether Hotel Group should accept this project using the Net Present Value (NPV) approach. Provide appropriate calculations, and briefly explain your answer.

d) Determine if the Internal Rate of Return (IRR) and Payback Period (PB) approaches contradict with NPV. Provide appropriate calculations, and briefly explain your answer.