Jane and Matt decided to invest part of their retirement money in a business. They thought of

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Question:

Jane and Matt decided to invest part of their retirement money in a business. They thought of owning and running an inn whose customers will mainly be tourists who come for the a festival.

For a couple of months, they collected basic information relevant and important to building and running an inn. First they scoured the newspapers and talked to realtors to look for an ideal house for sale located in a place perfect for an inn. They needed a house that is large enough to have six bedrooms, and have ample parking space for their guests. After several months of searching, they finally found one – an 80-year old Old Victorian 2500 square-foot home that sits in a half-acre lot selling for $350,000. The value of the land, estimated to be at $300,000.

They think that the house must be renovated, refurbished, and redecorated before it is ready for occupancy. After consulting with an architect and a building contractor, they estimated the renovation, refurbishing, redecorating, and landscaping to cost an additional $150,000. They also estimated that it would cost an additional $50,000 to furnish the inn. On top of these, they estimated they needed $50,000 as working capital.

In order to start the process, they needed a total of $600,000. They planned to invest $250,000 of their retirement fund and borrow the balance from a local bank at 8.0% interest per annum, payable in 30 years. They’ve figured that the inn could be open for business in January of 2021.

The inn they plan to build will have five bedrooms. The largest bedroom will be the Presidential Suite. Three medium rooms will be called the DeLuxe Room and one small room will be called Heavenly. After checking around, they thought to apply the following room rates:

Presidential $250 per night

Deluxe $150

Heavenly $100

They realize that running and maintaining the inn would cost additional money. After much research and discussion, they identified and listed expense items, and came up with what they deemed reasonable and expected monthly cost estimates shown below. They thought to use these expense items for all months of the year.

Expense Category.............................................................Est. Monthly Expense

Owner’s Salary..................................................................................$1,500

Housekeeper Salary (two full-time) ..............................................$4,000

Utilities – Gas...................................................................................$ 300

Utilities – Electric/Water......................................................................250

Advertising and Promotion ...............................................................300

Insurance.............................................................................................100

Maintenance Expense.........................................................................300

Landscape Maintenance....................................................................300

Telephone............................................................................................50

Website Maintenance.....................................................................150

Internet Cable Connection...............................................................50

Miscellaneous.................................................................................500

They are projecting a 3% increase in these costs from year 1 to year 2 and from year 2 to year 3.

They plan to open the inn 365 days per year. Occupancy rates wont be the same throughout the year.

Other assumptions:

Getting each room ready (regardless of type) costs $15.00

The cost of serving breakfast per room occupancy is $5.00

Depreciation Rates:

Building – 30 years (straight line)

Furniture Fixtures – 10 years (straight line)

QUESTION

Evaluate the financial viability of the planned business – the assumptions used in this business planning scenario. Are there any important assumptions that were not included or omitted in this scenario? What are they? If any assumption appears unrealistic or does not represent the current condition, change them and revise the financial template to reflect the more current assumptions.