You are the Asset Manager for a large hotel ownership company. You are working through capital projects submitted by the hotels in your portfolio. Using the data on the excel file, you will calculate the NPV for each of the projects one of your hotels has submitted. Make certain you read the case background and instructions.
Week 13 Assignment Capital Prioritization.docx Week 13 Assignment Capital Prioritization.docx – Alternative Formats
Capital Prioritization Case Study Data.xlsx
You will submit the completed Excel file using the name format “yourname.xlsx” and upload it by clicking the link above.
HOSP 4040 Asset Management
Assignment: Capital Prioritization
This assignment is due via the Assignment Link by
11: 59 PM Eastern, on the due date.
This assignment is worth 50 points, and will be graded based on the rubic. You may view the rubric by clicking on the assignment link.
Late work will not be accepted.
The Case
You are working as an Asset Manager for a major hotel ownership group. As a part of the annual budgeting process you are looking at several capital projects that have been submitted by one hotel in your portfolio. You have the capital funding available to do only one of these projects, and so you must select the project with the highest return.
Your company uses NPV as the primary tool for prioritization.
Background
Each year as a part of the capital budgeting process, hotels in your portfolio submit a 5 Year Capital Plan. Each year, your job is to review and approve the projects upcoming in the next year.
The projects fall into two categories. The first is required capital. This category includes Franchisor required cyclical renovations, the replacement of building systems and equipment that is required by end of life estimates.
The second category is incremental profit capital. This category includes projects for which there is a financial return that will improve the value of the hotel. Examples of the types of projects that are included in this category are: Space utilization changes, such as converting a restaurant or bar to meeting space (or vice versa), adding retail space, adding external amenities such as a pool bar, installing automated parking payment systems, adding labor saving technology, adding energy saving technology.
Each year, your company allocates a specific dollar amount for the incremental profit categories. Each Asset manager selects the project or projects that are forecast the highest returns. Then, the company senior management selects those projects from those submitted by the asset managers also based on those forecasting the highest return. Typically, about 10% of the projects that are submitted by the hotels are approved.
As a part of the submission process, the properties complete a standardized Excel file that is formatted to provide the asset manager the information they need to calculate the Net Present Value of the projects. NPV is used by the company to prioritize the incremental profit.
Your company uses three different discount rates based on the risk associated with the project. In consultation with the hotel, each Asset Manager determines the risk category, and the hotel includes this information on the project Excel template. This year, the discount rates are:
For low risk projects, a 12% rate.
For moderate risk projects, an 18% rate.
For high risk projects, a 24% rate.
The risk is based on the likelihood of achieving the proforma financial results the property is projecting.
The hotel has submitted the Excel file to you (it is included on the assignment link).
1. For each project, enter the discount rate based on the project risk.
2. Calculate the NPV of the project using the investment amount and the 5 year estimated cash flows provided by the hotel (these have already been analyized by you).
3. When you submit, enter the project you are selecting in the text field for the assignment.
4. Save the Excel file using the format yourname.xlsx. Upload this file using the assignment link.
Make certain you watch the video on how to calculate NPV in Excel!!!! You must use the Excel formula. Project 1
Strategic Capital Partners
Capital Project Request
Hotel Marriott Tapitio Pass
GM Hugo Gryll
Project Name Convert Bar to Meeting Space
Project Description:
This project will convert our existing “high energy” bar to meeting space. The popularity of the bar has eroded in recent years following the opening of several other clubs nearby. The cost of live entertainment and the security and liability concerns have also continued to rise. This plan will transition the 3,500 square feet into a multi-use meeting room. The space is adjacent to the lobby and has a wall of windows overlooking the pool area.
Proforma Assumptions:
The proforma assumes a 3 month construction period, a 20% capture of the bar revenue in the lobby bar (this is based on our observation of how many in-house guests were utilizing the bar during the past year), and meeting room revenue based on our historical 3 year average per square foot for the other meeting space in the hotel. Based on planner comments, we feel this space will be in high demand.
Risk Low
Cash Flow Proforma
Period Amount
Capital Investment 0 $ (127,500)
Incremental Cash Flow 1 $ 35,000
Incremental Cash Flow 2 $ 37,500
Incremental Cash Flow 3 $ 40,000
Incremental Cash Flow 4 $ 42,500
Incremental Cash Flow 5 $ 45,000
For Asset Manager Use:
Discount Rate
NPV
Project 2
Strategic Capital Partners
Capital Project Request
Hotel Marriott Tapitio Pass
GM Hugo Gryll
Project Name Build Market adjacent to the Front Desk
Project Description:
Franchisor has approved a new “grab and go” market place as a replacement for both a gift shop and room service. This is based on a long term study of guest preferences, and the fact that room service looses considerable money in every one of the hotels. Our project will utilize a portion of the gift shop space adjacent to the front desk, and the space will be cashiered by the front desk associates. The remaining space form the gift shop will be repurposed to a business/shipping center that will be leased. A local operator has signed a letter of intent to lease space for 10 years.
Proforma Assumptions:
Our proforma assumptions include the labor and other expense savings from the elimination of room service, the lease income from the existing gift shop and the incremental sales and profit of the market based on the data supplied from the Franchisor. This data is based on results from 750 existing units, and is sized based on our occupancy.
Risk Low
Cash Flow Proforma
Period Amount
Capital Investment 0 $ (65,000)
Incremental Cash Flow 1 $ 27,500
Incremental Cash Flow 2 $ 30,000
Incremental Cash Flow 3 $ 32,500
Incremental Cash Flow 4 $ 35,000
Incremental Cash Flow 5 $ 37,500
For Asset Manager Use:
Discount Rate
NPV
Project 3
Strategic Capital Partners
Capital Project Request
Hotel Marriott Tapitio Pass
GM Hugo Gryll
Project Name Install automated parking gates
Project Description:
This project will install automated parking gates at the two entrances to our parking lot. The office park that surrounmds the hotel has continued to grow, and non-guests are frequently using our parking facilities. We have analyized paid parking within our competitive set, and 3 of our 5 competitive hotels currently charge for parking. We have received Franchisor approval to begin charging for parking.
Proforma Assumptions:
The proforma assumes the gates will be installed in 3 days. Revenue assumptions are based on pricing competitively with our competitors who currently charge for parking, and based on our average overnight vehicle counts for past 2 years. This amount has also been discounted by 20% to account for potential disputes and potential inclusion of no cost parking for certain groups.
Risk Moderate
Cash Flow Proforma
Period Amount
Capital Investment 0 $ (65,000)
Incremental Cash Flow 1 $ 15,000
Incremental Cash Flow 2 $ 17,500
Incremental Cash Flow 3 $ 20,000
Incremental Cash Flow 4 $ 22,500
Incremental Cash Flow 5 $ 25,000
For Asset Manager Use:
Discount Rate
NPV
Project 4
Strategic Capital Partners
Capital Project Request
Hotel Marriott Tapitio Pass
GM Hugo Gryll
Project Name Upgrade Guest Room Locking System
Project Description:
This project will install the Franchisor approved guest room locking system and will allow guests to use their smartphones to bypass the front desk and unlock their doors. The Franchisor has tested this system in 250 hotels for the past 2 years and is scheduled to rollout globally within the next 3 years. This upgrade will be a mandatory brand standard beginning in 4 years, however there are incentives being given by the locking system vendor to install earlier. Based on the hotel results for those hotels piloting the system, they have been able to reduce front desk guest service agent man hours by 40%. The system is enormously popular with guests.
Proforma Assumptions:
The system will take 2 weeks to install and will be done by floor. We do not anticipate having any guest rooms out of service during the conversion. We will be taking advantage of the vendor preferred pricing and are assuming the 40% staffing reduction which has been achieved by the pilot hotels. We are assigning this project a low risk based on the Franchisor experience in the pilot hotels.
Risk Low
Cash Flow Proforma
Period Amount
Capital Investment 0 $ (155,000)
Incremental Cash Flow 1 $ 65,000
Incremental Cash Flow 2 $ 66,950
Incremental Cash Flow 3 $ 68,959
Incremental Cash Flow 4 $ 71,027
Incremental Cash Flow 5 $ 73,158
For Asset Manager Use:
Discount Rate
NPV