ScholarMatic: Explanation & Answer
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Value Lodges owns an economy motel chain and is considering building a new 200-unit motel. The cost to build the motel is estimated at $8,000,000; Value Lodges estimates furnishings for the motel will cost an additional $700,000 and will replacement every 5 years. Annual operating and maintenance costs for the motel are estimated to be $800,000. The average rental rate for a unit is anticipated to be $40/day. Value Lodges expects the motel to have a life of 15 years and a salvage value of $900,000 at the end of 15 years. The estimated salvage value assumes that the furnishings are not new. Furnishings have no salvage value at the end of each 5-year replacement interval. Assuming average daily occupancy percentages of 50%, 60%, 70% and 80% for years 1 through 4 respectively, and 90% for the fifth through fifteenth years, a MARR of 12% per year, 365 opening days per year, and ignoring the cost of land, should the motel be built? Base your decision on the IRR analysis.
ScholarMatic: Explanation & Answer
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