QUESTION $2(30$ MARKS$)$

Baeti $($Pty$)$ Ltd$,$ a company in the hospitality industry based in Johannesburg, is considering expanding its facilities by providing a gymnasium and spa for the use of guests. It is expected that the additional facilities will result in a increase in the occupancy rate of the hotel and in the rates that can be charged for each room.

The cost of refurbishing the space, which is currently used as library for guests, and installing the spa is estimated to be R$150000.$ The cost of the gymnasium equipment is expected to be a discounted amount of R$100000.$ The gymnasium and spa will need to be refurbished and the equipment replaced every four years. The equipment will be sold for R$25000$ cash at the end of year $4.$

The hotel accountant provided you with the following information for the hotel before the refurbishing of the library:

The current occupancy rate of the hotel is $80\%$

Total number of available rooms: $50$

Current average room rate per night: R$285$

The accountant also provided you with the hotel information after the refurbishment of the library. The new gymnasium and spa is expected to increase the occupancy rate to $85\%$ whilst the average room rate per night is also expected to increase by $5\%.$ The hotel is open for $360$ days per year.

Other relevant information from the accountant:

Staffing of only the gymnasium and spa

Number of employees: $4$

Average salary per employee per annum: R$34500$

Overheads

The hotel overheads are expected to increase by R$42000$ directly as a result of opening the gymnasium and spa.

Gymnasium equipment will require annual repairs and maintenance at a cost of R$15000$ per annum.

Taxation

Wear and tear allowance of $25\%$ per annum on all refurbishing and installation costs as well as the gymnasium equipment will be allowed by SARS.

Taxation rate is $27\%.$ Tax is payable at the end of each year.

The company's current WACC is $18\%$ and its target WACC is $17\mathrm{.}5\%$

Working capital

The project will require a working capital injection of R$50000$ in year $1.$

QUESTION $2($continued$)$

$5.$ Gymnasium equipment

Gym equipment will be sourced from a company called Euip $($Pty$)$ Ltd that employs the hotel Finance Manager's $("$FM$")$ brother as Head of Procurement. The arrangement between the two brothers is that the hotel will purchase the equipment from Equip for a discounted price in return for a cash payment directly from the hotel to the brother. The FM will facilitate the payment and this payment will be recorded as commission in the project accounts. The agreed amount is R$5000.$

Euip $($Pty$)$ Ltd will not provide any warranties for the equipment purchased as the brother will not be able to provide the hotel with proper supporting documentation for the purchase of the gym equipment.

REQUIRED:

$\backslash$table$[[($a$),\backslash$table$[[$Calculate the Net Present Value $($NPV$)$ of the gymnasium and spa$],[$project for the first cycle of the investment $($the first four years of the$],[$investment$).]],(18)],[($b$),\backslash$table$[[$Discuss the non$-$financial factors that must be considered before the$],[$company invests in the gymnasium and spa project.$]],(10)],[($c$),\backslash$table$[[$Based on both the financial and non$-$financial factors, advise$],[$management of Baeti as to whether the company must proceed with$],[$the gymnasium and spa project$]],(2)],[,$Total for Question $2,(30)]]$