rnover, 30% of function turnover and 10% of room turnover
Seasonal staffing:- average around 20% of non Room income
Seasonal staffing re Rooms :- average around 20% of room income in quarters where occupancy is over 60%
Other variable costs include:
Laundry costs – 15% of room income and 10% of restaurant and function income
Fixed Costs, which have increased at an average of 5% per annum, over the last few years can be summarised as:-
Staffing:- 50 permanent staff at an average annual cost of ￡25,000 (in 2009)
Heat & Light:- Current annual cost is ￡150,000
Maintenance and replacement:- Currently ￡400,000 per annum
Communications:- Currently ￡100,000
Marketing:- currently 2.5% of turnover
Other Costs (excluding interest, tax) are usually about ￡250,000 per annum
Taxation of 18% of profits after loan interest of 5% on the outstanding loan of ￡5,625,000 is payable. The loan is repayable by annual instalments of ￡375,000.
A Proforma Balance Sheet as at 31/12/2010 is attached, together with proforma Statements of Income and Expenditure for the last five years.
The owners are confident that they will be able to double the gross income from functions by making this addition, based on the 2007/8 level of activity.
However, there is opposition to the investment from some of the management, who believe that in the current state of business and the current economic recession, it would be unwise to make this investment.
You are required to prepare a report discussing the merits of the proposed investment and any alternatives, especially bearing in mind the current slowdown in trade, and make a recommendation to the owners.
You should consider the following matters:-
The investment will be made in Euros, thus exposing the owners to a risk in the exchange rate changing and the hotel in repaying the loan, over twenty years at the same interest rate as existing loans.
Although a substantial sum has been spent in renovating the premises, there is a suggestion that the hotel should upgrade the golf course to championship level. This would generate more high value residents and possibly more day visitors should a major golf event be played there. Limited resources would not permit both the functions suite and the golf course to be developed. The golf course, if redeveloped at a cost of ￡5,000,000, would be able to attract green fees (players) of the order of ￡100 per player per round (4 players in each game). During the Spring, Summer and Autumn seasons, it is estimated that in excess of 250 games could be played each week. It is not yet clear what additional costs may be involved, but it is likely that additional staff to maintain the golf course and also additional administrative staff would be needed, as well as equipment and consumables required for maintaining the golf course. This cost will increase in future years.
In your analysis you should consider the future income trends and the related costs and cash flows.
You should use suitable capital investment analysis techniques and Foreign Exchange management techniques, as well as demonstrating a sound underlying understanding of the various economic factors and their influences in the current economic climate.
You
