The Profitability of Investing in Adelaide - Case Study Example

Error: Reference source not found UNIVERSITY OF SOUTH AUSTRALIA Assignment Cover Sheet – Internal An Assignment cover sheet needs to be included with each assignment. Please complete all details clearly. When submitting the assignment online, please ensure this cover sheet is included at the start of your document. (Not as a separate attachment.) Please check your Course Information Booklet or contact your School Office for assignment submission locations. Name: Student ID                 Email: Course code and title: MATH 1053 – Quantitative Methods for Business School: Info. Tech. & Mathematical Sciences Program Code: Course Coordinator: Dr Belinda Chiera Tutor: Day, Time, Location of Tutorial: Assignment number: 1 Due date: by 12 noon on Friday, Sep. 19, 2014 Assignment topic as stated in Course Outline: Case Study Report Further Information: (e.g. state if extension was granted and attach evidence of approval, Revised Submission Date)   I declare that the work contained in this assignment is my own, except where acknowledgement of sources is made. I authorise the University to test any work submitted by me, using text comparison software, for instances of plagiarism. I understand this will involve the University or its contractor copying my work and storing it on a database to be used in future to test work submitted by others. I understand that I can obtain further information on this matter at http://www.unisanet.unisa.edu.au/learningconnection/student/studying/integrity.asp Note: The attachment of this statement on any electronically submitted assignments will be deemed to have the same authority as a signed statement. Signed: Date: Date received from student Assessment/grade Assessed by: Recorded: Dispatched (if applicable): [ENTER REPORT TITLE INCLUDING THE NAME OF THE PROPOSED HOTEL] for [Enter the name of the city] [Enter the date of submission] prepared by [Enter your name] Executive Summary Increasingly, US-based hotels see expansion into other markets as a key strategy in their quest for profits, growth and shareholder value creation. Following the tumultuous events of the year 2007 through 2012, hoteliers around the world are at it focused on growth. Corporate plans to expand into new market to improve service and attract new customers. The main pull of Jane expansion is the large potential pool of customer available in the Australia hotel industry. Although the US has a large market with a population of over 310 million people, it accounts for less 6 per cent of the global population. Therefore, Jane’s expansion into Australia market will vastly increase the number of customers for the hotel franchise firm. However, new opportunities will come with risks; foreign markets especially in the hotel industry are generally much riskier than US markets, with larger possibility of failure and loss. It is important that Jane Hotel take into account both potential risks and opportunities in their Adelaide expansion plans. This expansion report will explicitly take into account the profitability of investing in Adelaide, whether or not investing into cycling scheme a profitable venture, optimization of daily profit and travel booking. Lastly, this report will summarized the main findings of report and give its recommendation. Introduction The purpose of this report is to find out if investing in Adelaide in the hotel industry is profitable. This report, is divided into four section. The first section will address if it is profitable to invest in Adelaide. This part will analyze the type of loan Jane Hotel will take in-order to invest and reasons for investing in Adelaide. The second part of the paper will analyze the break even of the Jane’s Hotel bicycle business. The third section, will discuss the optimization of daily profit from travel booking at the Adelaide, Jane Hotel. Lastly, the recommendation will be made based on the findings in this analysis. Analysis 1. Is it profitable to invest in Adelaide? Aim The aim of this section is determine if the financial loan is sustainable at the end. Features As seen in Appendix 1, for Amortisation Schedule for the loan of $15M paid for the 20 years the the monthly repayment will be $118556.4 while the 5 years loan monthly repayment is $298790.4 per month. As noted in Appendix 1, the total interest for Amortisation Schedule for the loan of $15M will be $13,453,535.46 at the end of 15 years while the total interest at the end of 5 year period is $2,927,425.82. While the total amount paid for at the end of a 20 years loan will be $28,453,535.46, and at the end of a 5 years loan will be $17,927,425.82. Jane Consulting Group should choose a short term loan over the 20 years repayment term. The Group should also try to increase the monthly payments as much as possible to take advantage of the lower interest rate. The combination of bigger monthly payment and smaller interest rate will allow the hotel to have a much bigger payment on the outstanding balance. This approach will help the hotel to pay less interest rate on the loan and end the payment period of the loan within a shorter time. Reasons for investing in Adelaide In the year ending June 2014, tourism and travel generated 5.2 billion dollars of expenditure in Adelaide. Domestic overnight expenditure was worth 63 per cent of the total expenditure, international tourists expenditure accounted for 14 per cent of total, while domestic day trips made up the remaining 23 per cent. Fig 1: Tourism Generates $5.2 billion of expenditure A highly successful food industry. The state of Adelaide is home to wine industry; the base for the country’s largest producer of quality lamb meat, the state has a burgeoning aquaculture and fishing industry and is the source of sparkling mineral water and fresh juices used in the manufacture of high quality beverages. Meat, wine, dairy products, seafood, vegetables and fruits etc, makes Adelaide to be a tourism investment location. In addition, the water off Southern Australia are among the cleanest in the world. While, it a temperature climate, natural beauty, a thriving cultural community and arts combine to support the Federal state’s 1.8 billion dollars tourism industry. Finally, Adelaide's Festival Centre is recognized for its management, expertise in production, set design and construction for the film, theatre, display and advertising industries. Thus, over the years, Adelaide has gain a reputation as a major center for tourism and hospitality. 2. Will the cycling scheme be profitable? Aim The aim of this section is to determine whether the business is likely to make a profit and be successful or generate losses and eventually the idea not to be implemented a. Break Even Breakeven point is a point in a business where the number of unit that must be sold in order to produce a profit of zero but it will recover all the costs that are associated with the business. As calculated in the appendix 2. The business breakeven point is at 55 bicycles. This means Jane needs to hire 55 bicycles each week to break even. As seen in the graph in appendix 2 the at break even, the total expenses is $727.5 to operate the business, while the total revenue is $731.5 that is generated by the business if 55 bicycles are hired. b. Projected profit and loss In a business, the use of profit and loss projection is to determine how profitable the business will be. Projected will help the business fine tune the business for its optimal performance? By comparing the projected forecast with the actual performance of other businesses, Jane’s managements will see where they need to pay attention. The maximum possible number of bicycles that can be hired in order to project a weekly profit of $1000 dollars will not affect the breakeven profit. In order for bicycle business to make profit, the business need to hire out 55 bicycles as you can see in the graph in appendix 2. The $1000 profit per week can only be achieved if the following are done to the business. (1) the business need to reduce its fixed cost of maintaining their bicycles, and overall its variable costs. This can be achieved if the business purchases bicycles that are easily maintained. (2) Jane need to encourage more people to use their bicycles in order to realized a profit of $1000. This can be done through promotions or reduce the cost of hire so that more visitors can use their bicycles. But reducing the cost of hiring bicycles will raise the business contributing margin because the number of bicycles to be hired to achieve a weekly profit of $1000 will be raised, while the break even quantity will increase while break even profit will reduce. 2. Optimal Daily Profit from Travel Bookings Aim The aim of this section is to determine the profit that is generated from the generated from the hotel. The daily profit will be increased if the hotel increases the number of Ipod docking stations in the hotel guest rooms. The reasons for this will increase customer care which is important for the hotel to related to their customers and this will make a customers to be satisfied. In other worlds, satisfied customers bring in more profits. The cancellation policy for customer booking will not increase profit but the hotel should introduce policies such as not refunding 100 per cent booking fees but a return a percentage of that booking fees. This way it will discourage those customers that are not serious about staying at the hotel. One suggestions that can be made at the hotel is to train employees at the hotel to on ways and means of cutting unnecessary costs. In addition, the managements should employ new workers where necessary. Conclusion From the analysis, Jane’s management should invest into Adelaide hotel industry. At the moment, Adelaide is home to wine industry; the base for the country’s largest producer of quality lamb meat, the state has a burgeoning aquaculture and fishing industry and is the source of sparkling mineral water and fresh juices used in the manufacture of high quality beverages. Meat, wine, dairy products, seafood, vegetables and fruits etc, makes Adelaide to be a tourism investment location. Recommendation The Jane Hotel should negotiate the interest on loan to smaller ones. The Jane Hotel should gear itself in reducing its fixed and variable costs on its bicycle business; and lastly, References Appendix 1: Jane’s Treasure Amortization Calculation (a). Principal of $15M, Monthly repayment of commercial loan at 7.25% compounded interest. Principal 15000000 Annual Interest Rate 7.25% Compounding Period per Year 12 Years 20 Amount Earned 63668348.53 Duration 20 Monthly Repayment 118556.4 (b). Amortisation Schedule for the loan Year Payment Total Interest Total Your own Balance 1 $1,422,676.77 1,076,134.98 $346,541.80 14,653,458.20 2 2,845,353.55 2,126,293.77 719,059.78 14,280,940.22 3 4,268,030.32 3,148,529.25 1,119,501.07 13,880,498.93 4 5,690,707.09 4,140,748.33 1,549,958.76 13,450,041.24 5 7,113,383.86 5,100,701.04 2,012,682.82 12,987,317.18 18 25,608,181.91 13,249,459.75 12,358,722.16 2,641,277.84 19 27,030,858.68 13,399,205.96 13,631,652.72 1,368,347.28 20 28,453,535.46 13,453,535.46 15,000,000.00 $0.00 (c ). What will be the final 60th payment on this loan? Principal 15000000 Annual Interest Rate 7.25% Compounding Period per Year 12 Years 5 Monthly Repayment 298790.42 Year Payment Total Interest Total Your own Balance 1 $3,585,485.04 1,002,799.45 $2,582,685.60 12,417,314.40 2 7,170,970.09 1,812,005.18 5,358,964.91 9,641,035.09 3 10,756,455.13 2,413,105.74 8,343,349.39 6,656,650.61 4 14,341,940.17 2,790,501.92 11,551,438.26 3,448,561.74 5 17,927,425.22 2,927,425.22 15,000,000.00 0.00 60th Payment= $17,927,425.22 (total payment) - 17,628,635 (59th payment) = $298,790.22 (d). Loan amount 15000000 period 60 rate 6% interest amount 6300000 e. Cash In Revenue generated from hotel 6,384,000 Cash Out Investment 435,000 Loan Repayment 3060000 salaries 2340000 Utility Payment 312000 Total cash out 6147000 Change in cash flow 237000 Appendix 2-Break Even Question 2: a). Breakeven Point in Units = Fixed Costs/Price - Variable Costs Break even per week=425/[7n+(0.6*10.5)-(0.1n*55)] = 425/[(7n+6.3n)-5.5n] =425/(13.3n-5.5n) =425/7.8n Break even per month =4*(425/7.8n) Number of Bicycle Total Cost Total Revenue 0 0 0 5 452.5 66.5 10 480 133 15 507.5 199.5 20 535 266 25 562.5 332.5 30 590 399 35 617.5 465.5 40 645 532 45 672.5 598.5 50 700 665 55 727.5 731.5 60 755 798 65 782.5 864.5 70 810 931 75 837.5 997.5 80 865 1064 85 892.5 1130.5 90 920 1197 b). 1000=13.3n-(425-5.5n) 1000=13.3n-425+5.5n 1000=7.8n-425 7.8n=1425 n=1425/7.8 n=182.69 approximately 183 bicycles c). It is not possible to reach the desired target amount of $1,000 weekly profit. Profit=7.8n-425 Profit= (146*7.8)-425 Profit=713.8/week Profit=713.8*4=2855.2/month d). Break even per week=425/[5n+(0.6*10.5)-(0.1n*55)] = 425/[(5n+6.3n)-5.5n] =425/(11.3n-5.5n) =425/5.8n =73.27/n The contribution margin will reduce, break-even number of bicycles will increase and lastly break-even profit will reduce. Appendix 3 Decision variables are chosen so that a linear function of the decision variables is optimized and a simultaneous set of linear constraints involving the decision variables is satisfied. In our case decision variable will be “P” representing plain Jane rooms; “Q” representing Queen for a stay rooms; “K” representing King’s Ransom rooms; and “R” representing Rooms. Objective functions are equation representing the cost (loss) or profit (gain) related to the decision variables. Rooms to be hired per day is: nP+nQ+nK Read More