Essay Cove

Essay Cove

You are the asset manager for a midsize hotel in an urban market. Two possible improvements are under consideration for the hotel. The first is the addition of a new lounge, something that the hotel has long needed and that market analysis suggests would fill a need in the local market. If the lounge succeeds, it could produce significant profits for the hotel. If the market analysis is wrong, the lounge will be profitable, but not significantly so. The second improvement is a new, high-efficiency boiler that should provide large fuel cost savings over the life of the boiler. Both of these options cost the same, approximately $200,000. The NPV for the lounge is $50,000, using conservative assumptions, whereas the NPV on the boiler is $45,000.
Based purely on NPV, the lounge is clearly the way to go. But does a risk analysis change this calculus? Which is the more risky of the two ventures?

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