To which of these factors is the decision most sensitive

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Reference no: EM131507036

Question: Anationwide motel chain is considering locating a new motel in Bigtown, USA. The cost of building a 150-room motel (excluding furnishings) is $5 million. The firm uses a 15-year planning horizon to evaluate investments of this type. The furnishings for this motel must be replaced every five years at an estimated cost of $1,875,000 (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 $125,000. The market value of the motel after 15 years is estimated to be 20% 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 60% of its rooms each night. Assume the motel will be open 365 days per year. MARR is 10% 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?

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

Reference no: EM131507036

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