A hotel can spend Rs. 2,000,000 on a renovation returning Rs. 800,000, Rs. 900,000 and Rs. 1,000,000 at the end of years 1-3. Using a 12% required rate, find the NPV and advise management.
How to lay out the answer. Follow the frame, then write it in your own words.
1 · State the method. Discount each cash flow to today at 12% and subtract the cost.
2 · Find the discount factors.
1 ÷ 1.12 = 0.892857
1 ÷ 1.2544 = 0.797194
1 ÷ 1.404928 = 0.711780
3 · Present values.
800,000 → 714,285.71
900,000 → 717,474.49
1,000,000 → 711,780.25
4 · Total and NPV. Total PV = 2,143,540.45; NPV = 2,143,540.45 − 2,000,000 = +143,540.45.
5 · Decision. NPV is positive, so accept: the project earns more than 12%.
6 · Business link. Large Sri Lankan groups use this test before committing capital to hotels and plants.
