Reference no: EM133055889

Ms. Bastianovich, the CEO of BTT, the international Travel, Tour and hotel operations is reviewing her investment plan for eastern European country of Balkania a medieval country with many historical sites to visit by North American tourists. BTT will provide a complete travel package of airlines, hotel, three meals and sightseeing for their travelers. BTT offers its own tour, hotel, most of the meals and site visit services, only purchase group airfare and some lunch services from local restaurants when the group is in town during the site visits. Ms Bastianovich is contemplating purchasing a full service hotel in the capital city of Shanbe in the country of Balkania in northeast of Eastern Europe in 2020. This plan involves a capital outlay of $10 million for a 100-room full-service hotel with full kitchen to provide three meals in served in its restaurants, room service, a full licensed bar open from noon until late at night, a swimming pool, a good size gym. The hotel was built a year ago with new equipment, furniture, fixtures and other items. The average room occupancy percentage per year is estimated to be 70% with an average room rate of $100 per year. Room sales are estimated to be 65% of the total sales, food and beverage sales are estimated to be 30% of total sales and the remaining sales centers are estimated to contribute 5% to the hotel total sales per year. Fixed costs are estimated to be $4 million per year from 2020 for the next 5 years. The variable costs of operation are estimated to be 25% of total sales per year for the next 5 years. The expected rate of return is estimated to be 20%. Ms. Bastianovich is interested in calculating the first 5 years of the hotel operation. The hotel will last for 30 years before any major renovations occur. The Income Tax rate is payable at a rate of 15%. Capital expenditures (fixed assets) can be depreciated on a straight-line basis over five years.

1. Calculate the NPV of the proposed hotel investment. Discuss how sensitive is this NPV to future sales volume of the BTT hotel?

2. What are the pros and cons of waiting for a year before deciding whether to invest?