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​(Replacement chains​) Destination Hotels currently owns an older hotel on the best beachfront property on Hilton...

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Finance

​(Replacement chains​) Destination Hotels currently owns anolder hotel on the best beachfront property on Hilton Head​ Island,and it is considering either remodeling the hotel or tearing itdown and building a new convention​ hotel, but because both hotelswould occupy the same physical​ location, the company can onlychoose one project-that ​is, these are mutually exclusive projects.Both of these projects have the same initial outlay of $ 1,800,000.The first​ project, since it is a remodel of an existing​ hotel,has an expected life of 9 years and will provide free cash flows of$ 400,000 at the end of each year for all 9 years. In​ addition,this project can be repeated at the end of 9 years at the same costand with the same set of future cash flows. The proposed newconvention hotel has an expected life of 18 years and will producecash flows of $ 280,000 per year. The required rate of return onboth of these projects is 9 percent. Calculate the NPV usingreplacement chains to compare these two projects.

Answer & Explanation Solved by verified expert
4.2 Ratings (694 Votes)
RemodellingNew ConventionNPV8734800465157503Remodelling has higher cash flows and    See Answer
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