Reference no: EM132009682

Question: A nationwide motel chain is considering locating a new motel in Bigtown, USA. The cost of building a 160-room motel (excluding furnishings) is $4.7 million. The firm uses a 15-year planning horizon to evaluate investments of this type. The fumishings for this motel must be replaced every five years at an estimated cost of $1, 850,000 (at k = 0, 5, and 10). The old furnishings have no market value. Annual operating and maintenance expenses for the facility are estimated to be $120,000. The market value of the m after 15 years is estimated to be 25% of the original building cost. Rooms at the motel are projected to be rented at an average rate of $40 per night. On the average, the motel will rent 60% of its rooms each night. Assume the motel will be open 365 days per year MARR is 6% per year.

a. Using an annual-worth measure of merit, is the project economically attractive?

b. Investigate sensitivity to decision reversal for the following three factors: (1) capital investment, (2) MARR, and (3) occupancy rate (average percent of rooms rented per night). To which of these factors is the decision most sensitive? Assume that the market value remains constant at the amount used in part a

c. Graphically investigate the sensitivity of the AW to changes in the above three factors. Investigate changes over the interval plusminus 40%. On your graph, use percent change as the x-axis and AW as the y-axis.