Janes Treasure in Adelaide - Case Study Example

Jane’s Treasure in Adelaide: Case Study Report Name Institution Executive summary There are a number of factors that one considers before expanding their business. This is the case with Jane consulting group. The investment group has operated a hotel branch in one of the well-known tourism cities and it seems to do well. As a result of this the group is evaluating the profitability of opening similar ventures in a number of other cities that are tourism destinations. One of those cities is Adelaide. This report concentrates on the Adelaide city venture and tries to evaluate the positive impacts of the whole venture. It kicks off with an introduction that explains what the report entails and why it highlights unique features. The report then goes into determining the profitability of the venture. The net present value (NPV) method has been used to bring out the possibility of the venture being profitable. The venture turns out to be profitable in the long run unlike in the short run. It is therefore worthwhile to take up the venture if it will last for a period of more than three years. Otherwise it should not be ventured into. The report also shows the most appropriate type of loan funding to be adopted from calculation. From the two loan types available to Jane consulting group, the first loan seems expensive as compared to the second loan. It is therefore advisable that the group takes up the second loan. A break even analysis of venturing into a cycling business within the hotel branch has also been brought out in the report. The number of bicycles that are required to break even at the given conditions have been determined as part of the report. The report is then concluded with a inear programming model that tries to evaluate the optimality of balancing between the different types of rooms at the hotel business. A report on the viability of the Jane’s Treasure hotel branch Introduction Before anybody ventures into business or decides to expand their business they need to consider a number of factors. The likely results of venturing into such a business can be projected using a number of methods. Some of the methods that can be used to project the results include the use break even analysis, the use of linear programming models and the use of loan amortization schedules to determine the cost of any debt funds that are to be employed. Jane is out to expand her hotel business and like any other wise business person she has to evaluate the impacts of the ventures. One of the branches is to be located in Adelaide city. This report tries to bring out the results of the venture in Adelaide city. Probably the results will be applied for similar branches in other cities of interest and with similar conditions. A break even analysis the bicycle hiring and entertaining business is provided as part of the report. A linear programming model for part of the business venture is also provided as part of the report. Since capital is a critical part of any venture, the various capital sources available have been analyzed in the report. There are two loan types available to Jane and the report clearly depicts the consequences of taking up any of the loans. Part of the report has been dedicated to advising Jane as far as the type of loan to take up, the profitability of the whole venture and the results of taking up the venture are concerned. The information is analyzed in excel sheets and results discussed in this report for the purposes of easy decision making. 1. Is it profitable to invest in Adelaide? Aims of this section This section aims at bringing out the impacts of the decision of taking up the venture. It elaborates the profitability levels of the business by using the NPV method. It also aims at analyzing the impacts of the two loans and help the investor make a decision between the two loans. The major purpose of this section is to use the available information to help Jane make various decisions. Discussion of the results of appendix 1 Features of the commercial loan The commercial loan has a principle amount of $15,000,000. It has an amortization period of twenty years, with an interest rate of 7.25%. However, there is an agreement between Jane and the lender that the total loan should be repaid in a period of five years. From the excel sheet calculation and taking into account the agreement between Jane and the lender, a monthly amount of 1,013,645.33 dollars is to be paid for 60 months. The total amount that is to be paid at the end of the whole period considering both the principle and interest is equal to 60,818,720.07 dollars. For the alternative loan still the principle amount remains at 15,000,000 dollars. The loan is to be paid in a period of five years and it has an amortization period of five years. The total amount that that is to be paid by the end of the five year period is 21,300,000 dollars assuming Jane decides to pay the maximum monthly amount fixed by the lender. The monthly payment fixed by the lender is 355,000 dollars. From calculation shown in the excel sheet the interest rate is 7.265%. The total interest that is to be paid in case Jane takes up the first loan is equal to 45,818.720.07 dollars. For the second case if Jane takes up the loan she is expected to pay a total interest of 6,300,000 dollars. It is clear from the analysis that the second alternative is far much cheaper compared to the first loan. The difference in amortization periods between the two loans yields an interest difference of 39,518,720.07 dollars. Jane should therefore consider taking up the alternative loan instead of the initial commercial loan as it will save the organization a lot of cost in terms of interest. Profitability of the venture The net present value method has been employed in determining the profitability of the venture. Information on the cost of capital, cash inflows and cash outflows have been provided in the case study. From the information the annual net cash flows have been calculated and their present values obtained using the excel sheet. Cumulative net present values from year one to year five have been calculated in the excel sheet to help in decision making. The venture is profitable since it has a positive net present value (NPV) as from the third year. Jane investment group had a decision line which makes every venture that has a positive net present value from year three profitable hence the venture can be considered as a positive investment. 2. Profitability of the cycling business. The major aim of this section is to determine the impact of introducing a cycling venture at the hotel as an additional revenue source. The section analyzes the results of adopting different decisions in line with the cycling venture. Profits, break even points and the number of bicycles need to make the venture profitable with different conditions are brought out in the calculations shown in appendix 2. Discussion of the results of appendix 2 To earn revenue that will cover all the costs for the cycling venture, 55 bicycles will have to be hired by the hotel for each and every week. To make a profit of $ 1000, the hotel management will have to hire 183 bicycles. Taking into account the maximum number of bicycles that can be hired by the guests considering the full capacity of the hotel has a huge impact on the venture. It will see Jane investment make a profit of $ 713.8 per a week from the bicycle hiring business. This is lower as compared to the profit of $ 1,000 projected earlier without considering the maximum capacity of the hotel. It is clear from the impact on profits that there will be a huge impact on the hiring cost per a bicycle to achieve the break-even point achieved when there is no limit on the number of bicycles that can be hired. In case the management of Jane consulting decides that they must attain the $ 1000, then they will have to vary other factors considering the fact that the capacity of the hotel is limited. They could increase the hiring cost per a bicycle from $7 to a higher value for instance. They could also decide to raise the picnic cost for each of those who hire the bicycles and decide to attend the event. They could equally try to reduce the variable cost associated with maintenance of the bicycles to achieve the $ 1000. The management should look into all these alternatives, determine the impacts of each of them and decide on the best factor to alter. Reducing the cost of hiring a bicycle for each client will have a negative impact on the difference between the revenue per a bicycle and the cost of maintaining each bicycle. It will drastically reduce this difference. The break even units will obviously increase more bicycles will be required to be hired to cover costs. No profits are made at break-even points thus the whole change has zero impact on the profits made at the two break even points. Assumptions made in the analysis Since their can never be a fraction of a bicycle any decimals obtained in calculating break even units are rounded upwards. This is the only assumption made in the break even analysis. 3. Optimal daily profits from travel bookings Using appropriate steps the solution to the formulated linear programming model can be obtained on the excel sheet. Conclusion Jane and his consulting firm can go ahead and implement the venture. The various sections analyzed clearly depict that the venture is highly profitable. The net present value of the venture calculated for the first five years shows that the business is worth taking up. For the first two years the business will sustain losses, it will then break even in the second year and earn profits as from the third year. Since the decision point for Jane was a positive net present value as from the third year, it is worthwhile to invest in the business as it perfectly meets this condition. The bicycle cycling business will also do well if adopted. However, a number of critical factors have to be taken into consideration before adopting the bicycle cycling business. The maximum capacity of the hotel and the maximum number of bicycles that are likely to be hired in a week should be taken into consideration. The hiring cost should be fixed at a value that will see the organization make profits. Any costs associated with the venture should be minimized if the venture is to succeed. The price charged on each individual attending a picnic with the bicycle should be regulated after considering all the factors affecting it. From the linear programming model more of the rooms that are the most profitable should be built to help boost the profits of the business. Better entertainment facilities should be included in the implementation process to ensure a maximum profit is earned. The loan options available to Jane should be scrutinized for any other factors before adopting any of them. However, from the analysis provided adopting the second loan option will be cheaper than adopting the first loan. Jane should therefore take up the second loan and consider repaying it within a period of five years exploiting the maximum monthly repayment amount given by the lender. Recommendation Jane and her group should try and strike a balance between the various types of rooms. This will increase their number of customers as it will meet most of their demands. Reasonable prices should be determined for the rooms to make them affordable and profitable. More entertainment means should be sort to keep the customers comfortable and of course make an extra coin from the customers. Appendix 2 Break even analysis Cost of maintaining a single bicycle in a week is equal to $425 10% of the bicycles will require specialized maintenance at an average cost of$ 55 per week for each bike. Income to be generated per bike per week is equal to $ 7 60% of the cyclists will pay $10.50 a market picnic lunch and the cost of the picnic to the hotel is absorbed by other costs (a) Break even number of bicycles to be hired every week At break-even the total cost is equal to the total revenue Cost= revenue Let the number of bicycles at break-even be X Analyzing the cost Cost of basic maintenance per a week for X bicycles = $425 Cost for special maintenance of the bicycles per a week = $5.5 X Total cost that is to be incurred for X bicycles per a week= (425 +5.5 X) dollars Analyzing the revenue Direct revenue from X bicycles per a week = $ 7 X Income from picnic for X bicycles per a week= $ 6.3X Total revenue from the whole venture per a week= (7 X + 6.3 X) dollars Applying the break even equation Total revenue = total cost 7 X + 6.3 X =425 +5.5 X 7.8 X = 425 X= 55 bicycles b) Number of bicycles required to make a profit of $1,000 per a week Profit= revenue- cost 1000= (7 X + 6.3 X)-(425 +5.5 X) 1000= 7.8X -425 1425= 7.8X X= 183 bicycles. (c) Assuming a 79 guest rooms 85 % housing two persons each And 15 % a single guest each The total number of people that will be housed= 0.85*79*2+ 0.15*79 = 146 people If everybody hires a bicycle then 146 bicycles will be hired. Clearly this is way below the 183 bicycles required to make a profit of $1,000 highlighted in part (b) above The profit that can be obtained from the 146 people is calculated below Profit= total revenue- total cost = (7 X + 6.3 X)-(425 +5.5 X) Replacing the X with 146 gives the following results Profit= (7x 146 + 6.3 x 146)-(425+5.5 x 146) = $ 713.8 Assuming a month of four equal weeks and with the conditions similar to those mentioned above the total profit that will be = 713.8 x 4 = $ 2855.2 (d) The impact of reducing the hiring cost by the guests from $7 to $5 is discussed below Contribution margin= Revenue per bicycle- direct cost per a bicycle = 5+6.3-5.5 = $ 5.5 The contribution margin decreases to 5.5 dollars as shown above The new break even number of bicycles is analyzed below Total revenue = total cost 5 X + 6.3 X =425 +5.5 X 5.5 X = 425 X= 78 bicycles The break even number of bicycles increase to 78 bicycles Usually there are no profits at break-even hence the change has no impact zero profits at break even. Appendix 3 Formulating the linear programming model Decision variables Let the types of rooms owned by Jane investment be represented by the letters shown below Plane Jane rooms= X1 Queen for stay rooms= X2 King’s Ransom rooms=X3 Constraints Total number of rooms cannot exceed 79 X1 + X2+ X3 < =79 X1=8 6 X1 + 8 X2+ 8 X3 Read More