Reference no: EM133516304 , Length: word count:2000

Financial Decision Making

Assignment - Investment Appraisal

ROYAL Windsor HOTELS Plc (RWH)

The Organisation

John Fairstow went into the hotel business twenty-five years ago, setting up the company, Royal Windor Hotels plc (RWH), the first hotel being his Tudor home in Essex. Coming, as he did, from Essex, he was ideally placed to take advantage of the new "era of enterprise" which was quickly established by the new Thatcher government. He built up a successful chain of hotels and obtained a listing on the London Stock Exchange. The business continued to grow rapidly aided by successful hotel acquisitions from Grand Metropolitan and Crest Hotels.

By the 2000s, RWH had become regarded as the leading British-based hotelier in continental Europe. During this period of rapid growth it retained a comparatively small central management team and operated a continuous investment programme of refurbishment, upgrading and extension.

And so it was, by last year, the RWH group owned and operated a total of 180 hotels, 102 of which were located throughout the United Kingdom and 78 in continental Europe, with a reputation for quality service and hospitality.

The Tasks

This case study provides a comprehensive set of financial and accounting tasks.

Task

1 Corporate performance appraisal

2 Break-even analysis

3 Pricing special orders

4 Role of the budget & performance measurement

5 Investment appraisal

6 Financing expansion

TASK 1 - PERFORMANCE APPRAISAL

You are an analyst for an institutional investor with a holding in RWH. Do your homework by using the accounts and five year review to analyse RWH's financial performance and compare it with the industry as a whole.
What questions would you ask at the AGM?

TASK 2 - BREAK-EVEN ANALYSIS

John Fairstow walked briskly into the monthly financial review meeting and sat down.
"We all know that business is not as good as we'ld like, due to the recession in Europe.
I have just two questions for this meeting.

(A) How much further can our sales fall before we start running up losses, and
(B) What level of sales do we need to make the profit forecast I announced to the press last week of £200 million?
(C) Finally, what would these levels mean in terms of our occupancy rates?"

TASK 3 - PRICING SPECIFIC ORDERS

Following the recent Board meeting at which the profit target, together with utilisation and occupancy rates were discussed, the sales director has sent memos to all hotel managers setting out targets for occupancy and profits.

The 80 room Royal Hotel in Cambridge is part of the RWH Group. Its manager, Chad de Wick, is struggling to reach the profit target of £600,000 he has been set. He believes that his occupancy rate is not much different from the average throughout the group. He also thinks that the average charge of £120 per room (typically including two persons) is about right as a standard rate but that a lot of profitable business may be being missed by not offering competitive concessionary rates for weekend breaks, long-term stay and off-peak periods.

He has asked you to help him answer some questions and give him some advice

(A) What is his current occupancy rate
(B) If he keeps his current price structure unchanged, what is the level of sales required to achieve his new profit target?
(C) Advise him on the minimum he could charge for 'marginal' business?
(D) What are the dangers of pricing on such a basis?
(E) Assuming a concessionary rate of £60 per room is charged for "Special Break" week-end customers, how much extra sales is required to reach the profit target?

TASK 4 - INVESTMENT APPRAISAL

John Fairstow is obsessed with cutting central overhead costs back to the bone.
"Non-value-adding activity, like central administration, is just a waste" he argues.
He has asked you to look at a new management information system that should further reduce central overheads.

From your enquiries, you establish that four years ago a system was installed by RWH to support the central administrative functions. The total capital cost was £470,000. A life of nine years was estimated for the system with a disposal value of £20,000. It has a book value now of £270,000 after charging depreciation at a rate of £50,000 per annum.

You have identified a new and improved system, costing £400,000, that can do the same job more economically. The new system is likely to save £110,000 annually in staff and other costs at present day prices.

It will last for five years and is expected to sell for £50,000 after that time. The old system will be taken over by the company installing the new system, at a trade-in value of £100,000.

The general manager of RWH is hesitant about the proposed deal. She has declared her views on replacement as follows:
"I can never agree to dispose of an asset at a loss before the end of its useful life. It always makes sense to use an asset until you get your money out of it."

Required:

(A) Prepare a financial summary, which will show the net present value of the proposal, assuming a discount rate of 10%. How would you interpret your findings, and would you recommend the new acquisition?

(B) Comment on the general manager's reaction.

(C) What other factors should be considered?

Attachment:- Investment Appraisal.rar