Hotel DelRay is located at the heart of the city of Brussels, in Belgium. Brussels is...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Hotel DelRay is located at the heart of the city of Brussels, in Belgium. Brussels is a major hub for international politics, a home for several international organizations and diplomats, and a fortress for European Union Institutions. The importance of the city not only elevates the financial and economic infrastructure, also increases the volume of government and business travelers from all over the world. Thus, lodging establishments in the city of Brussels have recently been facing fierce local and international competition. DelRay, which is owned by Italian BD&T Hospitality Investment Company, has been in Brussels' local lodging industry for the past twentyfive plus years. DelRay is one of the most popular and demanded hotels in Brussels by the international government institutions due to its strategic position. The hotel's success is largely due to its great security procedures and they specialize in providing highly quality service based on international government protocols. Since its grand opening day, DelRay has had excellent records of growth figures, occupancy levels, and financial performance regardless of the time or the season of the year. However, in recent years, DelRay has started to observe inefficiencies in its operations and poor financial outcomes due to conventional and outdated operation systems in the property. Hence, the chairperson of BD&T has a recent discussion and a meeting with DelRay's GM about this issue and the chairperson of BD&T has suggested an upgrade the existing but not fully effective property management system (PMS). A critical part of this upgrade project is to come up with the optimal capital allocation and acquisition plan and the financial feasibility assessment based on the project's expected cash flows in the future. In this important meeting, BD&T and DelRay finance and accounting team has discussed and agreed on the project essentials as presented below. As UCF's Rosen College graduate and the director of Finance at DelRay, you are in charge of this capital acquisition and feasibility study for the expansion project. Project Assumptions & Limitations All of the estimations for the capital allocations and acquisition along with the financial feasibility will be based on the project assumptions and limitations as follows: Due to the new technology investment, sales are expected to increase on an incremental basis of $10,000 increase every year for the next 4 years. All of the overhead costs (except for the new equipment cost) are estimated on an incremental basis of $1,500 increase every year for the next 4 years. • Corporate tax bracket applied to DelRay is set at 40.00%. • Deprecation of the new PMS technology is estimated on a straightline method, which is set at S1,000 for the next 4 years. Estimated cash flows (CFs) are measured on an aftertax basis. • Cost of the new asset and the underlying overhead costs will be carried over to year I as shown in the 4year financial projections and aftertax proforma CF structure. • All project milestones are performed in accordance with the project completion schedule and there are no delays in project tasks. • All transactions are closed on annual basis with no carryover to subsequent years. • The cost of capital estimation requires the cost of permanent sources of both short and longterm capital as explained later in the writeup. • Cost of capital for this project is measured by the Weighted Average Cost of Capital (WACC). Estimation of the Net Investment Value (NINV) of the New PMS Upgrade: This upgrade project is going to give an opportunity to Hotel DelRay to replace the older PMS with the new technology so that the hotel can operate better to maximize their profit margins. Purchasing activities and processes of this new PMS technology will cost DelRay $57,000. In addition to the cost of the new asset, the old PMS technology can be sold for $10,000 in the market with a book value of $8,000. Hence, aftertax salvage value from the replaced assets is established based on the difference between market and book value of the old asset along with the effect of tax. Suppose that the new PMS technology will not cause DelRay to increase its net working capital. Further, additional charges and estimations for this new PMS technology for the initial year (1" year) are highlighted as follows: • Additional Staffing & Delivery Cost: • Shipping, Installation and Insurance Cost: • Maintenance Cost: • Design, Build, and Implementation of the New Technology: $16,000 $4,000 $2,000 $3,000 Capital Acquisition and Allocation & Estimation of the Cost of Capital (WACC): Imagine that DelRay is going to blend different capital sources to raise the funds needed for this upgrade project. The finance team of DelRay comes up with the optimal capital structure to finance this project by blending 40.00% debt (longterm corporate bonds), 30.00% new retained earnings as internal equity (internal common equity), and 30.00% external equity (new common stock issuances). Assume that DelRay is not going to use preferred stock to find this upgrade project. The details of the capital acquisition and allocation are as follows: • DelRay wants to issue 10year corporate bond at a $1,000 price with a 15.00% coupon rate and the issuance cost of each bond is $20 for each bond. "Kabe" is estimated as 6.84%. • DelRay wants to reinvest its retained earnings by selling for its common stock for $56.00. This stock pays a current dividend of S0.20 per share and earnings and dividends are expected to grow at 10.00% rate into foreseeable future. DelRay's common stock is currently selling for $39.00 per share. This stock expects to pay a current dividend of $1.60 per share and earnings and dividends are expected to grow at 7.00% rate. The issuance costs on this stock are $2.00 per share. Estimation of the Flow of Funds (Stream of Expected AfterTax CFs): The new PMS technology investment is expected to provide higher sales projections for Hotel DelRay. Based on the project's aforementioned assumptions and limitations, DelRay's management team has come up with 4year financial projections and aftertax proforma CF structure including project cost, other charges, tax, and depreciation, which are highlighted in the table below: 4year Financial Projections and AfterTax ProForma CF structure. Year 1 Year 2 Year 3 Year 4 Sales Projections: S50,000 Overhead Costs: Staffing Cost (S16,000) Shipping, Installation, and Insurance Cost (S4,000) Maintenance Cost ($2,000) Design, Build, and Implementation of the New Technology ($3,000) New Equipment Cost (S57,000) N/A N/A N/A Less: Depreciation Total Overhead Cost (S) (S) (S) (S) Aftertax Salvage Value N/A N/A N/A BeforeTax Cash Flows (S) $ $ Tax at 40.00% (S) $ $ Add: Depreciation $ $ AfterTax Cash Flows (S) $ Financial Feasibility Analysis of the New PMS Technology: After combining the preceding analysis and calculations for NINV, WACC, and CFs, DelRay is considering whether this new PMS technology investment is worthwhile to invest or not. Therefore, the finance team would like to analyze and see financial feasibility with different capital budgeting decision methods as indicated below: Project's Payback Period • The Net Present Value (NPV) • Project Profitability Index (PI) • The Internal Rate of Return (IRR) Required Analysis and Discussions: 1. Based on the given information in the "Estimation of the Net Investment Value (NINV) of the New PMS Upgrade" section, calculate the NINV of this upgrade project for the initial year (I" year) (40 pts.). 2. Given this capital structure and acquisition details, estimate the Weighted Average Cost of Capital (WACC) for this upgrade project (40 pts.). 3. According to the financial projections for the following 4year CF proforma, calculate the stream of CFs for this upgrade project (Hint: project assumptions and limitations are important to calculate CFs) (50 pts.). 4. Based on NINV, WACC, and CFs results, perform a financial feasibility analysis with four capital budgeting methods as illustrated in "Financial Feasibility Analysis of the New PMS Technology" section (40 pts). 5. Discuss your results and findings from NINV estimation, capital acquisition and WACC, flow of funds (CFs), and financial feasibility. Explain why is this worthwhile or not to invest in detail. In addition, explain the possible problematic areas and issues (i.e., cost of internal equity) to be improved for the project and for Delray's longterm financial success. Do not forget to support your arguments. You can solve this question using the main equations of those methods or using financial calculator or excel solutions as introduced in the textbook (30 pts). Full Name: Hotel DelRay New Property Management System (PMS) Acquisition & Installation Project Net Investment Value (NINV) Estimation for the New PMS Technology for the Initial Year Cost of the New PMS System Additional Staffing & Delivery Cost Shipping, Installation & Insurance Cost Maintenance Cost Design, Build, & Implementation of the New Technology Aftertax Salvage Value The Net Investment Value (NINV) Capital Acquisition and Allocation & Estimation of the Cost of Capital (WACC) Aftertax Cost of Debt M Po net C k abt ka Cost of New Retained Earnings (Internal Common Equity) do di Po ke Cost of External Equity (New Common Stock issuances) Po P, net do d1 K ne The Cost of Capital (WACC) ka Estimation of the Flow of Funds (Stream of Expected AfterTax CFs) 4year Financial Projections and Aftertax ProForma CF Structure Year 1 Year 2 Year 3 Year 4 Sales Projections Overhead Costs: Additional Staffing and Dellivery Cost Shipping, Installation, and Insurance Cost Maintenance Cost Design, Build, and Implementation of the New Technology New Equipment Cost N/A N/A N/A Less: Depreciation Total Overhead Cost Aftertax Salvage Value N/A N/A N/A Beforetax Cash Flows Tax at 40.00% Add: Depreciation Aftertax Cash Flows Hotel DelRay New Property Management System (PMS) Acquisition & Installation Project Financial Feasibility Analysis Years Aftertax CFS Cumulative CFs 1 3 WACC 0.00% Project's Payback Period The Net Present value (NPV) Project Profitability Index (PI) The Internal Rate of Return (IRR) Hotel DelRay New Property Management System (PMS) Acquisition & Installation Project Discussion of Your Results and Findings Hotel DelRay is located at the heart of the city of Brussels, in Belgium. Brussels is a major hub for international politics, a home for several international organizations and diplomats, and a fortress for European Union Institutions. The importance of the city not only elevates the financial and economic infrastructure, also increases the volume of government and business travelers from all over the world. Thus, lodging establishments in the city of Brussels have recently been facing fierce local and international competition. DelRay, which is owned by Italian BD&T Hospitality Investment Company, has been in Brussels' local lodging industry for the past twentyfive plus years. DelRay is one of the most popular and demanded hotels in Brussels by the international government institutions due to its strategic position. The hotel's success is largely due to its great security procedures and they specialize in providing highly quality service based on international government protocols. Since its grand opening day, DelRay has had excellent records of growth figures, occupancy levels, and financial performance regardless of the time or the season of the year. However, in recent years, DelRay has started to observe inefficiencies in its operations and poor financial outcomes due to conventional and outdated operation systems in the property. Hence, the chairperson of BD&T has a recent discussion and a meeting with DelRay's GM about this issue and the chairperson of BD&T has suggested an upgrade the existing but not fully effective property management system (PMS). A critical part of this upgrade project is to come up with the optimal capital allocation and acquisition plan and the financial feasibility assessment based on the project's expected cash flows in the future. In this important meeting, BD&T and DelRay finance and accounting team has discussed and agreed on the project essentials as presented below. As UCF's Rosen College graduate and the director of Finance at DelRay, you are in charge of this capital acquisition and feasibility study for the expansion project. Project Assumptions & Limitations All of the estimations for the capital allocations and acquisition along with the financial feasibility will be based on the project assumptions and limitations as follows: Due to the new technology investment, sales are expected to increase on an incremental basis of $10,000 increase every year for the next 4 years. All of the overhead costs (except for the new equipment cost) are estimated on an incremental basis of $1,500 increase every year for the next 4 years. • Corporate tax bracket applied to DelRay is set at 40.00%. • Deprecation of the new PMS technology is estimated on a straightline method, which is set at S1,000 for the next 4 years. Estimated cash flows (CFs) are measured on an aftertax basis. • Cost of the new asset and the underlying overhead costs will be carried over to year I as shown in the 4year financial projections and aftertax proforma CF structure. • All project milestones are performed in accordance with the project completion schedule and there are no delays in project tasks. • All transactions are closed on annual basis with no carryover to subsequent years. • The cost of capital estimation requires the cost of permanent sources of both short and longterm capital as explained later in the writeup. • Cost of capital for this project is measured by the Weighted Average Cost of Capital (WACC). Estimation of the Net Investment Value (NINV) of the New PMS Upgrade: This upgrade project is going to give an opportunity to Hotel DelRay to replace the older PMS with the new technology so that the hotel can operate better to maximize their profit margins. Purchasing activities and processes of this new PMS technology will cost DelRay $57,000. In addition to the cost of the new asset, the old PMS technology can be sold for $10,000 in the market with a book value of $8,000. Hence, aftertax salvage value from the replaced assets is established based on the difference between market and book value of the old asset along with the effect of tax. Suppose that the new PMS technology will not cause DelRay to increase its net working capital. Further, additional charges and estimations for this new PMS technology for the initial year (1" year) are highlighted as follows: • Additional Staffing & Delivery Cost: • Shipping, Installation and Insurance Cost: • Maintenance Cost: • Design, Build, and Implementation of the New Technology: $16,000 $4,000 $2,000 $3,000 Capital Acquisition and Allocation & Estimation of the Cost of Capital (WACC): Imagine that DelRay is going to blend different capital sources to raise the funds needed for this upgrade project. The finance team of DelRay comes up with the optimal capital structure to finance this project by blending 40.00% debt (longterm corporate bonds), 30.00% new retained earnings as internal equity (internal common equity), and 30.00% external equity (new common stock issuances). Assume that DelRay is not going to use preferred stock to find this upgrade project. The details of the capital acquisition and allocation are as follows: • DelRay wants to issue 10year corporate bond at a $1,000 price with a 15.00% coupon rate and the issuance cost of each bond is $20 for each bond. "Kabe" is estimated as 6.84%. • DelRay wants to reinvest its retained earnings by selling for its common stock for $56.00. This stock pays a current dividend of S0.20 per share and earnings and dividends are expected to grow at 10.00% rate into foreseeable future. DelRay's common stock is currently selling for $39.00 per share. This stock expects to pay a current dividend of $1.60 per share and earnings and dividends are expected to grow at 7.00% rate. The issuance costs on this stock are $2.00 per share. Estimation of the Flow of Funds (Stream of Expected AfterTax CFs): The new PMS technology investment is expected to provide higher sales projections for Hotel DelRay. Based on the project's aforementioned assumptions and limitations, DelRay's management team has come up with 4year financial projections and aftertax proforma CF structure including project cost, other charges, tax, and depreciation, which are highlighted in the table below: 4year Financial Projections and AfterTax ProForma CF structure. Year 1 Year 2 Year 3 Year 4 Sales Projections: S50,000 Overhead Costs: Staffing Cost (S16,000) Shipping, Installation, and Insurance Cost (S4,000) Maintenance Cost ($2,000) Design, Build, and Implementation of the New Technology ($3,000) New Equipment Cost (S57,000) N/A N/A N/A Less: Depreciation Total Overhead Cost (S) (S) (S) (S) Aftertax Salvage Value N/A N/A N/A BeforeTax Cash Flows (S) $ $ Tax at 40.00% (S) $ $ Add: Depreciation $ $ AfterTax Cash Flows (S) $ Financial Feasibility Analysis of the New PMS Technology: After combining the preceding analysis and calculations for NINV, WACC, and CFs, DelRay is considering whether this new PMS technology investment is worthwhile to invest or not. Therefore, the finance team would like to analyze and see financial feasibility with different capital budgeting decision methods as indicated below: Project's Payback Period • The Net Present Value (NPV) • Project Profitability Index (PI) • The Internal Rate of Return (IRR) Required Analysis and Discussions: 1. Based on the given information in the "Estimation of the Net Investment Value (NINV) of the New PMS Upgrade" section, calculate the NINV of this upgrade project for the initial year (I" year) (40 pts.). 2. Given this capital structure and acquisition details, estimate the Weighted Average Cost of Capital (WACC) for this upgrade project (40 pts.). 3. According to the financial projections for the following 4year CF proforma, calculate the stream of CFs for this upgrade project (Hint: project assumptions and limitations are important to calculate CFs) (50 pts.). 4. Based on NINV, WACC, and CFs results, perform a financial feasibility analysis with four capital budgeting methods as illustrated in "Financial Feasibility Analysis of the New PMS Technology" section (40 pts). 5. Discuss your results and findings from NINV estimation, capital acquisition and WACC, flow of funds (CFs), and financial feasibility. Explain why is this worthwhile or not to invest in detail. In addition, explain the possible problematic areas and issues (i.e., cost of internal equity) to be improved for the project and for Delray's longterm financial success. Do not forget to support your arguments. You can solve this question using the main equations of those methods or using financial calculator or excel solutions as introduced in the textbook (30 pts). Full Name: Hotel DelRay New Property Management System (PMS) Acquisition & Installation Project Net Investment Value (NINV) Estimation for the New PMS Technology for the Initial Year Cost of the New PMS System Additional Staffing & Delivery Cost Shipping, Installation & Insurance Cost Maintenance Cost Design, Build, & Implementation of the New Technology Aftertax Salvage Value The Net Investment Value (NINV) Capital Acquisition and Allocation & Estimation of the Cost of Capital (WACC) Aftertax Cost of Debt M Po net C k abt ka Cost of New Retained Earnings (Internal Common Equity) do di Po ke Cost of External Equity (New Common Stock issuances) Po P, net do d1 K ne The Cost of Capital (WACC) ka Estimation of the Flow of Funds (Stream of Expected AfterTax CFs) 4year Financial Projections and Aftertax ProForma CF Structure Year 1 Year 2 Year 3 Year 4 Sales Projections Overhead Costs: Additional Staffing and Dellivery Cost Shipping, Installation, and Insurance Cost Maintenance Cost Design, Build, and Implementation of the New Technology New Equipment Cost N/A N/A N/A Less: Depreciation Total Overhead Cost Aftertax Salvage Value N/A N/A N/A Beforetax Cash Flows Tax at 40.00% Add: Depreciation Aftertax Cash Flows Hotel DelRay New Property Management System (PMS) Acquisition & Installation Project Financial Feasibility Analysis Years Aftertax CFS Cumulative CFs 1 3 WACC 0.00% Project's Payback Period The Net Present value (NPV) Project Profitability Index (PI) The Internal Rate of Return (IRR) Hotel DelRay New Property Management System (PMS) Acquisition & Installation Project Discussion of Your Results and Findings
Expert Answer:
Answer rating: 100% (QA)
Hotel DelRay New Property Management System PMS Acquisition Installation Project Net Investment Value NINV Estimation for the New PMS Technology for t... View the full answer
Related Book For
Managerial Accounting for the Hospitality Industry
ISBN: 9781119386223
2nd edition
Authors: Lea R. Dopson, David K. Hayes
Posted Date:
Students also viewed these accounting questions

1. Manually do the following steps using the appropriate formula. SHOW YOUR WORK! WRITE THE FORMULAS AND SHOW YOUR WORK STEP BY STEP. USE ONY the formulas in the FORMULA SHEET! a. Develop the...

Cash flows for a particular project should be measured on an incremental basis and should consider all the indirect effects of the project. What does this involve?

A San Diego partner's father lives in San Diego. The partner does not furnish any financial support for his father. This partner also has a cousin living in Los Angeles. He furnishes all the...

The National Health Statistics Reports dated Oct. 22, 2008, included the following information on the heights (in.) for nonHispanic white females: a. Calculate and interpret a confidence interval at...

Lisa Company had outstanding 100,000 shares of common stock. On January 10, 2015, Marg Company purchased a block of these shares in the open market at $ 20 per share, with the intent of holding the...

Perform the indicated operations and express results in simplest form. x + x2 1+ X +1 1

You are trying to value the same building based on comparable properties sold in recent years. There have been six property sales of buildings of comparable size in the surrounding area. a. Estimate...

Valley Corporation is attempting to select the best of a group of independent projects competing for the firms fixed capital budget of $4.5 million. The firm recognizes that any unused portion of...

Need to know how to work this out. . 6/7/22, 9:25 PM Review Test Submission: Unit 1 Participation Questions ... False Question 5 0 out of 0.5 points Sam refuses to retire until his retirement acc...

The map below shows the countries of Belize (B), Costa Rica (C), El Salvador (E), Guatemala (G), Honduras (H), Nicaragua (N), and Panama (P). Represent the map as a graph where each vertex represents...

Liabilities on the Balance Sheet For each of the following situations, indicate the amount shown as a liability on the balance sheet of Javier, Inc. at December 31: The situation doesn't require a...

How does the organizational architecture mediate the complexities inherent in contemporary business ecosystems, particularly in the context of global interconnectivity and rapid technological...

The position of an object as a function of time is r=(3.2t++0.90t^2)i^+(1.7t1.2t^2)j^m where t is the time in seconds. a) Find the object's magnitude of the acceleration. Express your answer using...

A $89,000 mortgage is to be amortized by making monthly payments for 25 years. Interest is 3.9% compounded semiannually for a fiveyear term. (a) Compute the size of the monthly payment. Determine...

How do mechanistic and organic organizational structures diverge in their fundamental principles, and what implications do these variances hold for adaptability and responsiveness to environmental...

You have the choice of receiving $50,000 now, or $19,000 now and another $35,000 two years from now. In terms of today's dollar, which choice is better and by how much? Money is worth 4.2% compounded...

8. After collecting 217 completed questionnaires and reviewing the results, you find you?re no closer to deciding on a location than you were before. Chances are it?s because your marketing questions...

After Theorem 1.5 we note that multiplying a row by 0 is not allowed because that could change a solution set. Give an example of a system with solution set S0 where after multiplying a row by 0 the...

A bar manager estimates her next months beverage revenue will be $85,200. The bar manager forecasts her Cost of Sales: Beverages for next month to be 22%. What would be amount of this managers...

Business owners prepare balance sheets to better understand the value of a business and a. How well its assets have been utilized to produce wealth. b. The revenue producing ability of the business....

A manager sells a piece of operating equipment. Which of the following represents the impact of the sale? a. Decrease in assets; resulting in source of funds b. Decrease in assets; resulting from use...

Rowe Corporation authorized \(\$ 600,000\) of \(8 \%\) (cash interest payable semiannually) 10 year bonds. The bonds were dated January 1, 2020. Interest dates are June 30 and December 31. Assuming...

Yale Corporation issued to Zap Corporation \(\$ 60,000,8 \%\) (cash interest payable semiannually on June 30 and December 31) 10 year bonds dated and sold on January 1,2020 . Assume that the company...

A 10 year, \(6 \%, \$ 1,000\) bond (cash interest payable \(3 \%\) semiannually) is sold to yield \(8 \%\) interest. Compute the bond selling price.
Study smarter with the SolutionInn App