skyview Manor

skyview Manor - Transcript

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Question 1 On average how many rooms must be rented each night in season for the hotel to breakeven
Calculating the break even occupancy level requires splitting the costs in Exhibit 1 into the fixed and variable components a Variable Costs Cleaning supplies 1 920 Linen service 13 920 1 2 Misc expense 3 657 19 497 b Per Occupied Room Night 19 497 7 680 120 80 80 2 54 c Contribution Margin Average revenue 160 800 7 680 20 94 Revenue Variable Cost 20 94 2 54 18 40 d Fixed Costs Total Costs Variable Costs Fixed Costs 138 410 19 497 118 913 e Break Even 118 913 18 40 6 463 room nights Per night 120 54 rooms 68 occupancy

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Question 2 The hotel is full on weekends in the ski season If all room rates were raised 5 on weekend nights but occupancy fell to 72 rooms instead of 80 what is the revised profit before taxes for the year per Exhibit 1
The easiest way to make the calculation is to calculate the change in Contribution Margin CM since fixed costs will not change Lost CM 8 rooms 34 weekend nights 120 2 7 34 18 40 5 005 Added CM 72 rooms 34 nights 5 12 240 Net Change 12 240 5 005 7 235 more profit before tax The breakeven number for lost rooms per night is give by X Breakeven lost rooms X 18 40 80 X 5 18 4X 5X 400 23 4X 400 X 17 The price increase is a good idea as long as we can rent at least 63 rooms per weekend night

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Question 3 Contribution Margin in the Off Season
1 Revenue Single 10 Double 15 weighted average 14 2 Variable Cost from question 1 2 54 room night 3 Contribution Margin Revenue Variable Cost 14 2 54 11 46 room night

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Question 4 The Options
1 2 3 4 5 6 7 Do nothing Stay open no advertising no pool Stay open advertise no pool Stay open no advertising pool only Stay open advertise pool only Stay open no advertising pool and bubble Stay open advertise pool and bubble
Pool No No 2 Advertise 3 Yes 5 7 Yes Bubble No Yes 4 6

Incremental Fixed Expenses
DECISION ALTERNATIVE Total 0 1 Status Quo Repair Insurance 500 Mrs K a 4200 Adv Pool Dep n b 5000 Bubble Dep n c 3000 Pool Ex Phone d 4200 or 8800 e 720

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Elect f 3675

Maids g 4320

2000

4000

15 415 2 adv no pool no 19 415 3 adv yes pool no 24 615 4 adv no pool yes bubble no 28 615 5 adv yes pool yes bubble no 32 215 6 adv no pool yes bubble yes 36 215 7 adv yes pool yes bubble yes























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a b c d

35 weeks x 100 week 3500 x 1 2 4200 25000 5 5000 15000 5 3000 Pool expense if only open off season and no bubble Lifeguard 3x400 1200 Insurance Taxes 1200 Maintenance 1800 4200 Pool expense if opened year round with bubble From above 4200 Additional Lifeguard 3600 Heating 1000 8800

e 30 rooms 3 per room 90 x 8 months 720 f Total Utility Cost from the case 6360 less Phone Expense 1560 290x4 50x8 1 560 Electricity Expense 4800 for 9600 available rooms For 7350 available rooms 7350 9600 x 4800 3 675 g We pay four maids during the season for 7 680 occupied nights 120x80x 8 which is 1920 rooms per maid Each maid cleans 16 rooms average during the week and 20 rooms on the weekend With only 30 rooms open off season and only 40 maximum occupancy expected 12 rooms only one extra maid is needed The cost is 15 day x 240 days 3600 4320 with fringes

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Question 5 Break even Occupancy Rates
Decision Alternatives same order as for Q2 and Q3 Available room days 30 x 245 7350 1 2 3 4 5 6 7 Not Applicable 15415 11 46 1345 19415 11 46 1694 24615 11 46 2148 28615 11 46 2497 32215 11 46 2811 36215 11 46 3160 1345 7350 18 1694 7350 23 2148 7350 29 2497 7350 34 2811 7350 38 3160 7350 43

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Question 7 Investment
1 Depreciation of 30 000 with a 15 year life implies buildings furnishings of 450 000 2 Interest expense of 21 716 for the first year at 5 interest implies an average one year old mortgage balance of about 434 000 beginning balance new mortgage of 440 000 and ending balance of 430 00 Assuming a normal mortgage limit of 80 of value the property is worth about 550 000 3 This would imply about 100 000 for non depreciable land 550 000 450 000 which seems reasonable 4 There is probably very little working capital investment here no receivables very little inventory and perhaps some modest accruals for wages payroll taxes and miscellaneous bills We would estimate a net of about zero except for cash 5 The cash balance would have to be large enough to support the float on day to day operations over the year Exhibit 1 here is a rough estimate of cash flows over the twelve months The business would need about 55 000 in cash at the end of a season April 1 to carry it through until December including a 10 cushion From December to March the business probably needs about 20 000 in cash at any time roughly 1 month s payments plus a 10 cushion Thus at March 31 we would estimate a cash balance of probably 55 000 with an average monthly balance closer to 30 000

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Exhibit 1
Estimated Cash Flows Summary for a Year
Season Dec March 160 8 5 0 2 4 2 9 7 2 17 5 3 5 2 0 1 0 5 0 2 0 5 4 13 9 5 6 10 7 10 7 77 5 83 3 Out of Season April Nov

Revenues Expenses Manager Wife Clerk Maids Total Payroll Fringes Property Tax Insurance Repair and Maintenance Cleaning Supplies Utilities Linen Service Miscellaneous Mortgage 31 700 Income Tax Total NET

10 0 10 0 2 0 2 0 2 0 12 2 1 0 1 7 21 0 51 7 51 7

Net Earnings 11 6 Depreciation 30 0 Mortgage Principal 10 0

31 6

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Skyview Manor Balance Sheet
Assets Cash Accounts Receivable Inventory Supplies Buildings Equip Gross Deprn Land TOTAL 55 000 0 1 000 450 000 30 000 420 000 100 000 576 000 Equities Accruals 1 000

Mortgage

430 000

Equity

145 000 576 000

Beginning Investment 165 000 cash 55 20 of Prop 110 Earnings 12 000 Dividend 32 000 Ending Investment 145 000

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Earnings
Profit after taxes for the first year was 11 600 after deducting 30 000 of depreciation If we make the very reasonable assumption for commercial real estate that the Repairs and Maintenance budget of 17 000 keeps the building in good shape then only the depreciation on Equipment is a real expense Assuming this is 5 000 of the 30 000 the remaining 25 000 is just a tax shelter courtesy of U S tax laws Real earnings of the business then are more like 37 000 12 000 25 000 per year Assuming that it would be possible to keep the property mortgaged at 80 of value all the time and that the value does not drop below the 550 000 purchase price the owners should be able to take out 37 000 a year as discretionary income for the next 15 years

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Return on Investment
The purchase price of 550 000 represents a 11 5 multiple on the unlevered annual free cash flow of the business which is about 48 000 37 000 from above plus the after tax equivalent of the interest expense which is about 11 000 This is in the high end of the old rule of thumb range 8 to 12 times suggesting this is a good commercial property The earnings calculations here confirm this The 37 000 levered return on the 165 000 levered investment is about 22 after taxes This is a good solid return on a business we would consider to be well above average in risk Remember that in 1963 no one was yet aware of how big a boom was coming in the ski industry over the next 20 years In short we see the Skyview Manor as a good return business for the owners but subject to high business risk The combination of high business risk and high operating leverage mean that it is very important for the owners to do everything possible to protect and grow their business This analysis definitely sets a particular context for evaluating the swimming pool investment and the off season clientele proposal