A nationwide motel chain is considering locating a new motel in Bigtown, USA. The cost of building a 150-room motel (excluding furnishings) is $4.8 million. The firm uses a 12-year planning horizon to evaluate investments of this type. The furnishings for this motel must be replaced every four years at an estimated cost of $1,825,000 (at k=0, 4, and 8). The old furnishings have no market value. Annual operating and maintenance expenses for the facility are estimated to be $115,000. The market value of the motel after 12 years is estimated to be 15% of the original building cost. Rooms at the motel are projected to be rented at an average rate of $45 per night. On the average, the motel will rent 55% 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 + 30%. On your graph, use percent change as the x-axis and AW as the y-axis.
A nationwide motel chain is considering locating a new motel in Bigtown, USA. The cost of building a 150-room motel (excluding furnishings) is $4.8 million. The firm uses a 12-year planning horizon to evaluate investments of this type. The furnishings for this motel must be replaced every four years at an estimated cost of $1,825,000 (at k=0, 4, and 8). The old furnishings have no market value. Annual operating and maintenance expenses for the facility are estimated to be $115,000. The market value of the motel after 12 years is estimated to be 15% of the original building cost. Rooms at the motel are projected to be rented at an average rate of $45 per night. On the average, the motel will rent 55% 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 + 30%. On your graph, use percent change as the x-axis and AW as the y-axis.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:A nationwide motel chain is considering locating a new motel in Bigtown, USA. The cost of building a 150-room motel (excluding furnishings) is $4.8 million. The firm uses a 12-year
planning horizon to evaluate investments of this type. The furnishings for this motel must be replaced every four years at an estimated cost of $1,825,000 (at k= 0, 4, and 8). The old
furnishings have no market value. Annual operating and maintenance expenses for the facility are estimated to be $115,000. The market value of the motel after 12 years is estimated to
be 15% of the original building cost. Rooms at the motel are projected to be rented at an average rate of $45 per night. On the average, the motel will rent 55% of its rooms each night.
Assume the motel will be open 365 days per year. MARR is 6% per year.
a. Using an annual-worth measure of merit, is the project economically attractive?
b. Investigate sensitivity to decision reversal for the following three factors: (1) capital investment, (2) MARR, and (3) occupancy rate (average percent of rooms rented per night). To which
of these factors is the decision most sensitive? Assume that the market value remains constant at the amount used in part a.
c. Graphically investigate the sensitivity of the AW to changes in the above three factors. Investigate changes over the interval +30%. On your graph, use percent change as the x-axis
and AW as the y-axis.
Click the icon to view the interest and annuity table for discrete compounding when the MARR is 6% per year.
a. Calculate the Aw value for the project.
AW(6%) =$ 183.4 thousand (Round to one decimal place.)
Based on the AW value, the project is
economically feasible.
b. Investigate sensitivity to decision reversal. (Round to one decimal place.)
Sensitivity with respect to Decision Reversal
32.0'%
64,4` %
Factor
Capital investment
MARR
Occupancy rate
- 13.5 %
The decision is most sensitive to changes in occupancy rate
C. Plot the AW of each alternative against the changes in the above three factors.
Use the line drawing tool to plot the lines that represent the AW value for each factor. Use the range from - 30% to 30% change for your plot. Be sure to properly label your lines.
600000-
400000-
200000
0-
-200000-
-40 -30
-20
-10
10
20
30
40
% Change
Annual Worth
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