Changes in net present value

In a long-term decision model for project feasibility, what impact on a developer-owner's net present value would occur for each of the following changes in the model's assumptions?

1. Decrease in the net present value.
2. Increase in the net present value.
3. No change in the net present value.

Treat each item below independent of all other items and place the correct number (1-3) in the space provided. Each change has only one correct answer.

_1___ a. Decrease projected average room rates
Since the revenue decreases (lower projected room rates) after tax cash flow (ATCF) will decrease. Hence there is a decrease in net present value (NPV)

1_____ b. Increase the equity hurdle rate

Since the ATCF is discounted at the equity hurdle rate to arrive at NPR, an increase in the equity hurdle rate will cause a decrease in net present value (NPV)

2 _____ c. Lower projected energy expenses
Since the expenses decreases ,after tax cash flow (ATCF) will increase. Hence there is an increase in net present value (NPV)

__3___ d. Decrease mortgage principal amount provided by the lender

This will lead to lower interest expenses but since the total investment remains the same the developer owner will have to either provide this decrease in the amount provided by the lender either himself. This will have implications in terms of more investment by the owner (equity) in the beginning which gets reduced from the discounted cash flow to arrive at NPV. So the two effects ( decrease in interest payments and more investment at zero time) will cancel each other out.

2_____ e. Lower the interest rate charged by the lender
This will lead to lower interest expenses. After tax cash flow (ATCF) will therefore increase. Hence there is an increase in net present value (NPV)

3_____ f. Increase the amortization period of the mortgage
The interest rate and the period of the mortgage are related so that the net present value of the mortgage loan is the same. Hence an increase in the amortization period of the mortgage will have no bearing on the NPV of owner-developer.

2_____ g. Decrease the capitalization rate used to estimate the reversion value
Reversion Value is a lump-sum benefit that an investor receives or expects to receive at the termination of an investment. This lump sum value is divided by the capitalization rate to arrive at NPV. Hence a decrease the capitalization rate will increase the NPV of the owner-developer.

__2___ h. Increase the multiple used to estimate the sale price of the hotel
Since this will increase the cash flow the NPV will increase.

2 _____ i. Decrease the hotel's project cost

Since a decrease in costs translates into higher cash flow to the owner-developer the NPV will increase
__3___j. Increase the reserve for replacement
This has no bearing on cash flow, only how the cash flow is classified the NPV will not change.

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