Capital budgeting Case Study Problem
Margaritaville Hotel – Tybee Island, GA
Margaritaville Hotel Properties is opening a new beach resort in Tybee Island, GA at a cost of $250 Million in year 0. The hotel is expected to operate for 20 years and at the end, be sold for approximately $500 Million in year 20. As an investment the hotel expected to earn $27 Million per year (including $20 Million in year 20). With a discount rate of 8% and reinvestment rate of 8%, analyze the projects feasibility using:
- Discounted Payback
- Profitability Index
It turns out, you forgot that the franchise company that licenses the Margaritaville name will require the hotel owners to renovate the hotel property in year 10. This will result in significant room closures and a significant capital investment. Therefore, cash flows in that year 10 are expected to be -$5 Million. Using MIRR, what did you get for a rate of return?