Reference no: EM132725328

Question - Excellent Hotel Company has recently signed a 10 years rental contract with the owner of a building, to launcha 20 floors luxury hotel with 250 rooms in Tianjin downtown. The rental fee of the building is annually $5 million in the first 3 years, and $6 million the next 7 years.

Excellent Hotel Company has invested $24 million on decoration, furniture and all the equipment. Among the capital, there were $10 million financed from bank for 10 years long-term debts @ 6% annual interest rate. The rest parts of investment were equity capital of the company.

Excellent Hotel Tianjin was estimated 60%occupancy and $350 ADR in the first 3 years. The management team assumed 5% increase in occupancy and 10% of ADR at the 4th year and keep stable for the rest years.

Excellent Hotel Tianjin has a restaurant of 100 seats. The management team expected seats turnover rate as 1.8 times per day, the average check as $75 per guest.

The variable expenses including payroll, benefit, incentive and other related expense were estimated to be $60 per room per nightin the first 3 years. The management team also assumed that would increase to $70 for the rest 7 years. Other expenses for rooms including uniforms, cleaning supplies, laundry, etc. expected 10% of room sales revenue.

The direct cost including labor and raw materials of restaurant expected to be 60% of F&B revenue, other expenses of R&B expected to be 5% of total F&B sales revenue.

The Sales and Marketing expense is expected as 8% of total sales.

Administrative including IT, HR, utilities, maintenance, etc., is expected as 15% of total sales revenue.

The company planned to allocate all the undistributed expenses of management to each revenue center, 90% to rooms department and 10% to restaurant.

According to the agreement with bank, Excellent Hotel Tianjin will repay the principal of the long-term debts equally at the end of each year. The interests of the loan will be paid at the same time.

The minimum return rate for the company's own capital was required as 15%.

Suppose no Income tax for the company.

Required -

1. Please prepare 10 years income statement of this investment.

2. Please calculate the break even occupancy for rooms and break even seats turnover for F&B in the first year.

3. Please calculate IRR of this investment. Is this a good investment? Why?

4. During 3 month pre-opening operation, the actual occupancy was only 55% with $320 ADR. Please figure out the variance of room department, include sales variance, price variance, quantity variance, and please share your opinion about how to improve.

5. The management team plan to join the famous chain brand to improve the performance. The Best Hotel group committed to achieve 65% average occupancy and $375 ADR in the first year. The Best Hotel also agreed to the Revenue incremental plan of Excellent HotelCompany. The royalty fee of The Best Group is base pay $1,000,000 the first year plus 5% sales revenue every year. Is that a good opportunity?