340–342, 344 (December, 1983). Brands is a company that has undergone several entity changes over the years, so much so that while it is currently the second-largest restaurant company in the world, it is relatively unknown to the general public. Today that same seat costs about $2.2 million. 1. Year 3 Year 4 Year 5 75 65% 17794 $65.00 $1,156,594 $312,280 $844,313 75 70% 19163 $65.00 $1,245,563 $336,302 $909,261 75 75% 20531 $65.00 $1,334,531 $360,323 $974,208 $277,583 $566,731 $104,093 $462,638 $34,698 $427,940 $298,935 $610,326 $112,101 $498,225 $37,367 $460,858 $320,288 $653,920 $120,108 $533,813 $40,036 $493,777 Calculate the project’s ROI, NPV, and IRR. Mantle is currently evaluating expansion possibilities and is looking into opening a trendy diner concept restaurant in a ski resort area. Is this a risky proposition? Time Value of Money The time value of money concept (TVM) is the cornerstone of investment analysis. The second phase of expansion kicked in during June 1992, when Schultz took the company public. IMPORTANCE TO THE HOSPITALITY MANAGER As a hospitality manager, understanding the time value of money concept, the concept of market value, and learning the investment analysis skills based on these concepts is important to your success. ACCOUNTING SYSTEM—CP3 SYSTEM FINANCIAL REPORTING he goals of chapter 2 are to introduce you to the financial and management reports you will encounter during your hospitality career and to teach you how to read and interpret them. Influx of Foreign Capital During the late 1980s, certain international financial markets were not performing well. Operating expenses are expenditures directly related to the day-to-day operation of the business and include the cost of goods sold, payroll, marketing, repair and maintenance, and energy expense. I N S U R A N C E C O M PA N I E S A N D P E N S I O N F U N D S . Project infrastructure is construction needed to connect a new building with existing public facilities and/or utilities. Steps on Excel Note: Type only the symbols or letters within the bracket [ ] and not the bracket itself. Selecting the form of legal entity for the new venture may seem easy, but it can be somewhat complicated. ■ Current ratio ■ Accounts receivable turnover ■ Average collection period ■ Food inventory turnover ■ Fixed asset turnover ■ Total asset turnover ■ Profit margin ■ Return on assets ■ Return on equity ■ Long-term debt to total capitalization ■ Debt-to-equity ratio ■ Time interest earned ■ Fixed charge coverage ■ Food cost percentage ■ Labor cost percentage Utilizing the calculations in question 1, analyze the ratios for Larry’s Luncheon Spot. Source: Gose, J. Over his thirty-five-year career, Rushmore has provided consultation services to owners and lenders involved with more than 12,000 hotels throughout the world. GROWTH STRATEGIES 121 McDonald’s Restaurants implemented a creative growth strategy many years ago when it began serving breakfast at all of its restaurants. If our hotel had achieved an occupancy rate of 73.9%, its index would have been 100, reflecting that it achieved exactly the occupancy of its competitive set. PENSION FUNDS Much like insurance companies, pension funds also need to invest the money employees contribute so that when the individuals retire, there is sufficient money to provide for their retirement. Seller A approaches you with a new hotel/condominium opportunity with a development cost of $150 million. The amount of each expense is divided by the revenue amount to derive its percentage. We begin the chapter with a brief review of the accounting principles and system of accounts that provide the foundation for the preparation of financial statements. Daily payroll cost report c. Rooms revenue forecast d. Food and beverage menu abstract e. Accounts receivable aging schedule 4. Everything from management salaries to the company’s profitability to lawsuits filed against the company is available for public viewing. Reduce risk by diversifying into new products and/or markets. You are also now aware of financial tricks that can be played to purposely misrepresent financial data and mislead the readers of financial statements. Choice Hotels International has an elaborate website for its prospective franchisees, and Hilton Hotels and Cendant Hotels also offer useful information: http: / / www.choicehotelsfranchise.com http: / / www.hiltonfranchise.com http: / / hotelfranchise.cendant.com In addition to the financial rewards that franchising offers the owner of a particular brand, franchising also provides the following benefits to branded companies seeking growth: 1. If you input $100 as the present value of an investment, $712.31 as the future value, and 49 years as the compounding period, you would have earned an interest rate of 4.09% per year. We also provide page references to the chapter where the tool or skill was originally presented and illustrated. In Texas, a state franchise tax is levied on corporations and LLCs. Enter 1762.34 and then close the calculation by typing [)]. The higher a company’s earnings per share, the higher its multiple. The company also plans to continue its highly successful international expansion into Asian markets, particularly China. In spite of his success, Schultz has an even greater vision for his coffee empire. While it is not critical that you know how each statement is prepared, if you understand the basic components and what information is contained on each, you can better determine how the business is performing, how financially healthy it is, and how its value might be increased through better management. Therefore, don’t be afraid to sharpen your Scenario A Given: Annual cash flow projected for the final year of the analysis period = $120,000 Assumed cap rate = 12% Estimated sale price: $120,000 divided by 12% = $1,000,000 Scenario B Given: Annual cash flow projected for the final year of the analysis period = $120,000 Assumed cap rate – 10% Estimated sale price: $120,000 divided by 10% = $1,200,000 Point The discounted present value of $1.2 million is greater than the discounted present value of $1.0; therefore, the lower the cap rate, the higher the resulting PV, NPV, and IRR. He has worked as a general manager for Steak and Ale Restaurants, Bennigan’s Restaurants, and Olive Garden Italian Restaurants before branching out as the owner and managing partner of Outback Steakhouse, located in San Antonio, Texas. ➤ As the risk of receiving projected future cash flow increases, the investor’s hurdle rate increases, WACC increases, and the present or market value of the asset decreases. http: / / www.travelcomexpo.com / speaker bios.asp?reqEvent⫽6&ID⫽1667. In finance, this principle applies to commercial properties. During its life as a public company, other financial twists and turns may occur. The company’s competitors viewed the market as desirable and wanted to expand into it. Just as you needed to learn the alphabet before you could read and write, you must learn the key accounting principles and terminology before you can effectively read and analyze financial statements and management reports. Key Points ➤ The key elements of an investment package are an executive summary, project fact sheet, business plan, source and use of funds statement, photographs and renderings of project, thirdparty confirmation, line item project budget, qualifications of the project team, and personal financial data on the sponsors of the deal. Hotel equity REITs became popular in the early to mid-1990s. His work is now carried on by his sons, Barron and Eric. A further limiting factor on the amount your lender will lend is his loan-to-cost ratio (LTC). If you are attempting to finance a startup business with no track record and your management team lacks experience, make sure you surround yourself with seasoned professionals and reward them well. By September 2005, the trust owned $1.4 billion of assets comprising seventyseven hotels and $100 million in mezzanine loans. 3, 6. With the number of 6.3528, the calculation of the FVA with an interest factor taken from the table will be FVA 5 = 600 ⫻ (6.3528) = $3,811.68 I L L U S T R AT I O N 7 - 5 Future Value of an Annuity Calculation Using the Formula and Table Methods TABLE 7-3 Table of Factors for the Future Value of a $1 Annuity NUMBER OF CASH FLOWS COMPOUNDING RATE 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 1 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 2 2.0100 2.0200 2.0300 2.0400 2.0500 2.0600 2.0700 2.0800 2.0900 2.1000 2.1100 2.1200 3 3.0301 3.0604 3.0909 3.1216 3.1525 3.1836 3.2149 3.2464 3.2781 3.3100 3.3421 3.3744 4 4.0604 4.1216 4.1836 4.2465 4.3101 4.3746 4.4399 4.5061 4.5731 4.6410 4.7097 4.7793 5 5.1010 5.2040 5.3091 5.4163 5.5256 5.6371 5.7507 5.8666 5.9847 6.1051 6.2278 6.3528 6 6.1520 6.3081 6.4684 6.6330 6.8019 6.9753 7.1533 7.3359 7.5233 7.7156 7.9129 8.1152 7 7.2135 7.4343 7.6625 7.8983 8.1420 8.3938 8.6540 8.9228 9.2004 9.4872 9.7833 10.0890 8 8.2857 8.5830 8.8923 9.2142 9.5491 9.8975 10.2598 10.6366 11.0285 11.4359 11.8594 12.2997 9 9.3685 9.7546 10.1591 10.5828 11.0266 11.4913 11.9780 12.4876 13.0210 13.5795 14.1640 14.7757 10 10.4622 10.9497 11.4639 12.0061 12.5779 13.1808 13.8164 14.4866 15.1929 15.9374 16.7220 17.5487 11 11.5668 12.1687 12.8078 13.4864 14.2068 14.9716 15.7836 16.6455 17.5603 18.5312 19.5614 20.6546 12 12.6825 13.4121 14.1920 15.0258 15.9171 16.8699 17.8885 18.9771 20.1407 21.3843 22.7132 24.1331 13 13.8093 14.6803 15.6178 16.6268 17.7130 18.8821 20.1406 21.4953 22.9534 24.5227 26.2116 28.0291 14 14.9474 15.9739 17.0863 18.2919 19.5986 21.0151 22.5505 24.2149 26.0192 27.9750 30.0949 32.3926 15 16.0969 17.2934 18.5989 20.0236 21.5786 23.2760 25.1290 27.1521 29.3609 31.7725 34.4054 37.2797 16 17.2579 18.6393 20.1569 21.8245 23.6575 25.6725 27.8881 30.3243 33.0034 35.9497 39.1899 42.7533 17 18.4304 20.0121 21.7616 23.6975 25.8404 28.2129 30.8402 33.7502 36.9737 40.5447 44.5008 48.8837 18 19.6147 21.4123 23.4144 25.6454 28.1324 30.9057 33.9990 37.4502 41.3013 45.5992 50.3959 55.7497 19 20.8109 22.8406 25.1169 27.6712 30.5390 33.7600 37.3790 41.4463 46.0185 51.1591 56.9395 63.4397 20 22.0190 24.2974 26.8704 29.7781 33.0660 36.7856 40.9955 45.7620 51.1601 57.2750 64.2028 72.0524 21 23.2392 25.7833 28.6765 31.9692 35.7193 39.9927 44.8652 50.4229 56.7645 64.0025 72.2651 81.6987 22 24.4716 27.2990 30.5368 34.2480 38.5052 43.3923 49.0057 55.4568 62.8733 71.4027 81.2143 92.5026 23 25.7163 28.8450 32.4529 36.6179 41.4305 46.9958 53.4361 60.8933 69.5319 79.5430 91.1479 104.6029 24 26.9735 30.4219 34.4265 39.0826 44.5020 50.8156 58.1767 66.7648 76.7898 88.4973 102.1742 118.1552 25 28.2432 32.0303 36.4593 41.6459 47.7271 54.8645 63.2490 73.1059 84.7009 98.3471 114.4133 133.3339 26 29.5256 33.6709 38.5330 44.3117 51.1135 59.1564 68.6765 79.9544 93.3240 109.1818 127.9988 150.3339 27 30.8209 35.3443 40.7096 47.0842 54.6691 63.7058 74.4838 87.3508 102.7231 121.0999 143.0786 169.3740 28 32.1291 37.0512 42.9309 49.9676 58.4026 68.5281 80.6977 95.3388 112.9682 134.2099 159.8173 190.6989 29 33.4504 38.7922 45.2189 52.9663 62.3227 73.6398 87.3465 103.9659 124.1354 148.6309 178.3972 214.5828 30 34.7849 40.5681 47.5754 56.0849 66.4388 79.0582 94.4608 113.2832 136.3075 164.4940 199.0209 241.3327 196 CHAPTER 7 䡲 THE TIME VALUE OF MONEY |----------|----------|----------|----------|----------| 0 1 2 3 4 5 Years $600 $600 $600 $600 $600 at 12% interest FV = ? F A C T O R S I M P A C T I N G I N V E S T M E N T A N A LY S I S C A L C U L A T I O N S a. This service is easy to use, but there is normally a set-up fee and a monthly charge. The income statement for a restaurant includes food revenues, beverage revenues, and retail sales. ➤ Managerial reports help hospitality managers understand the efficiency and effectiveness of their operations. For example, Miami Beach, Florida, agreed to issue $52 million in bonds as its share of the total land and construction cost of $158 million for the development of a hotel, while the developer contributed $15 million of equity. Management is aware that this is INVESTMENT ANALYSIS 245 an archaic system and that a POS system will create efficiencies, but they are not sure it is worth the cost. Preview of Chapter 10 The Investment Package 1. H O R I Z O N TA L O R C O M PA R A T I V E A N A LY S I S : Tracks operating performance over a specified period, including dollar amount and percentage changes. The Condor Hotel is on the market, and the owners are looking to sell the asset because they are in the process of focusing their business on retail establishments and feel the hotel does not fit well in their portfolio of properties. The company has an ownership interest in 60 hotels comprising 7,390 rooms in 15 states across the country. Note that total liabilities have decreased, and total equity has increased by 5.68 percentage points. 2. The number of compounding periods has now changed to 60. Not only does he need to look at today’s numbers but also at the month-to-date calculations to determine if there are any trends. Also, be careful of hidden charges that may be attached to a loan agreement. 3. What would Mr. Cruz’s options be after the five-year term has ended? With his management team, Juan Carlos has determined cash inflows and outflows for the first ninety days of business: ■ The test location will open in September to coincide with cooler weather and the hope that more people will be inclined to purchase hot coffee. The challenge they face, however, is the company’s need for large quantities of capital to grow. How did this occur? The financial management may be overseen by a particular manager at a company, or it may be one of several concerns dealt with by a single individual. Maui Ocean can obtain a loan from 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 A B Input and assumptions 3,000,000 Purchase price 2,000,000 Renovations 500,000 Estimated net cash flow during renovations 1,400,000 Revenues beginning Year 2 8% Percentage increase in sales per year 825,000 Expenses beginning Year 2 6% Percentage increase in expenses per year 50% Debt ratio 50% Equity ratio 7% Cost of debt, including tax effect 20% Hurdle rate 10% market cap rate Process C D Year 0 Year 1 E F G H 2. Off-balance-sheet financing is used by some companies that do not want to show debt on their balance sheet associated with a real estate joint venture of which they own a percentage. In other words, talk the talk and walk the walk. When THE NEED FOR GROWTH 119 employees can clearly see a promising career path ahead of them, they are also less likely to seek employment elsewhere. It is also expected that the aggregate portfolio will be large enough and of sufficient quality to attract primarily institutional buyers such as hotel REITs and C-corporations. Type [=] to invoke an equation calculation. A B C D E 1 I / Y (WACC) N (Year) 2 8.925% 1 FV (Annual Cash Flow) CPT PV Calculations $ 2,750,000 $2,524,672.94 ⫽PV(A2,B2,0,-C2) 3 8.925% 2 4 8.925% 3 $ 3,500,000 $2,949,938.13 ⫽PV(A3,B3,0,-C3) $ 4,000,000 $3,095,118.53 ⫽PV(A4,B4,0,-C4) 5 8.925% 6 8.925% 4 $ 4,500,000 $3,196,702.64 ⫽PV(A5,B5,0,-C5) 5 $ 5,000,000 $3,260,860.06 ⫽PV(A6,B6,0,-C6) 7 8 8.925% 6 $ 5,500,000 $3,293,042.06 ⫽PV(A7,B7,0,-C7) 8.925% 7 $ 6,000,000 $3,298,057.86 ⫽PV(A8,B8,0,-C8) 9 8.925% 8 $ 6,000,000 $3,027,824.52 ⫽PV(A9,B9,0,-C9) 10 8.925% 9 $ 6,000,000 $2,779,733.32 ⫽PV(A10,B10,0,-C10) 11 8.925% 10 $ 6,000,000 $2,551,970.00 ⫽PV(A11,B11,0,-C11) Step #3 Add the present value of all cash flows, and you will get $55,497,620. 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