The Staya Night discount motel chain is considering a proposal to build a new motel that would have 150 rooms.
• Revenues: Once the motel is operational, it will generate revenue of $100 per night per room that is occupied. This price is expected to hold constant over the lifespan of the project.
• Operational Costs: Daily operational including labour and materials; costs are $5,000 + $20 per occupied room in year 1, and both will increase 3% annually. Accounts Receivable, Accounts Payable and Inventory can be ignored.
• Administrative Expense: Administrative expense is estimated at $350,000 annually with no annual change. Annual Replacement Expense (furniture etc.) is $50,000 in year one and will grow10% per year after that. Marketing is planned at $60,000 annually.
• Investment: The motel will cost $1,000,000 to build. Simplify depreciation to be calculated as straight line over 30 years. It will be financed with a 30 year loan at 8% interest compounded annually with annual payments. It will be sold at the end of year 15 for $300,000, at which time the remaining balance on the load will be paid. The land lease cost is $100,000 annually. The corporate minimally attractive rate of return is 15%. Tax rate is 35%.
1. Prepare an income statement and cash flow statement.
2. Devise three alternative scenarios concerning the motel project. Make one variable an average occupancy rate percentage. You are free to choose more 2 variables. Make and state any assumptions, if needed. Specify your evaluation criteria.
3. Submit your analysis as a management proposal including any recommendations suggested by the scenario analyses.