Reference no: EM132668492
Hospitality Inns Financial Results:
Hotel Revenue £1,200,000
Hospitality Inns is part of a large chain of hotels owned by Cambridge Hotels Ltd. Hospitality Inns has full control over its pricing, buying and investment strategies. It has the following results for 20X0:
Hotel Costs £ 960,000
Operating profit £ 240,000
Book Value of Assets:
Fixed assets £ 600,000
Net Current assets £ 400,000
Total Net Assets £1,000,000
The manager of Hospitality Inns has the option to invest in a new swimming pool for the hotel. The investment will require an extra £800,000 of assets, but is expected to generate an additional £160,000 of operating profit.
Cambridge Hotels currently assesses its divisions on an ROI basis. It pays a bonus to the divisional manager who achieves the highest ROI during the year. Cambridge Hotels is a highly geared company and borrows at an average interest rate of 10%.
Problem 1. As the manager of Hospitality Hotels, would you invest in the swimming pool project?
Problem 2. Does the use of ROI lead to "goal congruence" within the whole firm?
Problem 3. Would changing to residual income help?
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