The Aberdeen Development Corporation (ADC) is considering the Aberdeen Resort Hotel project. It would
be located right on the picturesque banks of Grays Harbor and have its own championship-level golf course.
The cost to purchase the land would be $3 million, payable right now. Construction costs would be
approximately $2 million, payable at the end of year 1. However, the construction costs are uncertain – they
could be up to 20% higher or lower than the estimate. Assume the construction costs would follow a
triangular distribution.
ADC is very uncertain about the annual operating profits (or losses) that would be generated once the hotel
was constructed. Their best guess for the annual operating profit that would be generated in years 2, 3, 4,
and 5 is $700,000. Due to their great uncertainty, they guess the standard deviation to also be about
$700,000. Assume each year is independent and follows the normal distribution (for calculating NPV,
assume all profits are received at year end).
At the end of year 5, they plan to sell the hotel. The selling price is likely to be somewhere between $4 and
$8 million (all values in this range are equally likely).