Rooms at the Motel Are Projected to Be Rented at an Average

Problem 1

A large mudslide caused by heavy rains will cost Sabino County $1,000,000 per occurrence in lost property-tax revenues. In any given year there is one change in 100 that a major mudslide will occur. A civil engineer has proposed constructing a culvertr on a mountain where mudslides are likely. The culvert will reduce the likelihood of a mudslide to almost zero. The capital investment would be $50,000 and annual maintenance expenses would be $2000 in the first year, increasing by 5% per year thereafter.

If the life of the culvert is expected to be 20 years and the cost of capital to Sabino County is 7% per year, should the culvert be built?

Will you change your decision if the cost of capital to the county is 10% per year?

Problem 2

An European motel chain is considering location of a new motel in Hengelo. The coast of building a 150 room motel (excluding furnishings) is $5 milion. The firm uses a 15-year planning horizon to evaluate investments of this type. The furnishings for this motel must be replaced every 5 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 expences for the facility are estimated to be $125,000. The market value of the motel after 15 year is estimated to be 20% of the original building cost.

Rooms at the motel are projected to be rented at an average

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. The MARR is 10% per year.

a.  Is the project economically attractive.

b.  B. investigate sensitivity to decision reversal for the following three factors:

–capital investment

-MARR

-occupancy rate (average percent of rooms rented per night)

to which of these factors is the decision most sensitive

Problem 3

Jackson County is planning to make road improvements along a section of one of the county highways. Two alternatives have been identified. Alternative A requires an initial outlay of $100,000 at the end of year 0 and yearly (end of the year) maintenance costs of $15,200 each year thereafter. It will produce benefits to the public valued at $34,400 per year (end of year 1 and each year thereafter. Alternative B requires an initial outlay of $210,000 at the end of year 0 and yearly (end of year) maintenance costs of $10,600 each year thereafter. It will produce benefits tot the public valued at $36,500 per year (end of year 1 and each year thereafter). It would also be possible to do nothing, which would cost nothing and would produce no benefits to the public. The county uses an annual 12% MARR for decision making, and its willing to make this decision on the basis of cost. Analyse this problem using the benefit-cost-ratio method and using a PW approach and explain what you would recommend that the county do. You must show the ratios that you use to make your recommendations.