could you help me to fill the blanks? PMI, #3 and #4. Background Michelle has be
ID: 2713035 • Letter: C
Question
could you help me to fill the blanks? PMI, #3 and #4.
Background Michelle has been working in the finance department of her company for 2 years. Yesterday her boss Janet informed her that they were wrapping up a final proposal on a new Residence Inn in Chesterfield, a tertiary market of St. Louis, Missouri. The original plans included a small kitchen and staging area to be used by outside caterers to deliver and prepare food for the meeting space. Janet was starting to question whether or not outsourcing was the best alternative. Consequently, she asked Michelle if she could prepare 2 capital budgets comparing the costs and benefits of both in-house and out-sourced catering for the new property. To help Janet get started she provided the information below gathered from other company-owned hotel franchises. 1: Determine the average annual revenue per square feet for hotels that provide in-house or outsourced catering services. (4 pts) Midwestern hotels in tertiary markets In House Catering Sq Feet Annual Revenue Annual Revenue/Sq Foot Hyatt Place Hyatt House Hilton Garden Inn Embassy Suites Hampton Inn Courtyard by Marriott Residence Inn Springhill Suites Weighted Average In-House Weighted Average Out-Sourced 3400 1800 3200 6800 2400 3500 2900 4100 17500 10600 $450,000 $117,000 $377,000 $888,000 $152,000 $174,000 $191,000 509,000 2224000 634000 $132.35 $65.00 $117.81 $130.59 $63.33 $49.71 $65.86 124.15 $127.09 S59.81 Out Sourced 3500 10% 4% 30% 70% Revenue Assumptions Total Meeting Space (Sq Feet) Revenue Growth Rate (Years 2 through 4) Revenue Growth Rate (Years 5+) Revenue from food Revenue from room rental and AV In-House 3500 10% 4% 65% 35% Out Sourced $60,000 $70,000 $10,000 0% S0 $35,000 Cost Assumptions Depreciable Assets (3 Years) Depreciable Assets (7 Years) Salvage value of all assets at time 7 Food Cost (as a % of food revenue) Executive Chef Salary Events Manager Salary In-House $80,000 $180,000 $20,000 32% $40,000 $35,000Explanation / Answer
4) Recommendation and basis of decision:
The various measures for the two alterntives ie; In house catering Vs Outsourcing can be plotted as below:
The NPV, IRR and PI are higher for In house catering. Hence, In house catering is recommended.
CAPITAL BUDGET WITH OUTSOURCING 0 1 2 3 4 5 6 7 Capital Items Capital Investment -130000 Salvage Value 10000 Capital Gain Tax -1500 Investment Related Cash Flow Operating Items Revenue 209335 230269 253295 278625 289770 301361 313415 Operating Costs Food costs 0 0 0 0 0 0 0 Salary of Chef & Manager 35000 35000 35000 35000 35000 35000 35000 Service Staff Wages (18%) 37680 41448 45593 50152 52159 54245 56415 ` Other Operating Costs 37680 41448 45593 50152 52159 54245 56415 Depreciation (SLM Method) 30000 30000 30000 10000 10000 10000 10000 Taxable Income 68974 82372 97109 133320 140453 147871 155586 Tax @ 35% 24141 28830 33988 46662 49158 51755 54455 Profit after tax 44833 53542 63121 86658 91294 96116 101131 Add Depreciation 30000 30000 30000 10000 10000 10000 10000 Cash from Operations 74833 83542 93121 96658 101294 106116 111131 Working Capital 10000 0 Change in Working Capital -10000 10000 Operating Cash Flow -140000 74833 83542 93121 96658 101294 106116 129631 Free Cash Flow -140000 74833 83542 93121 96658 101294 106116 129631 P V Interest Factor for 10% 1 0.909 0.826 0.751 0.683 0.621 0.564 0.513 Present Value of FCF -140000 68024 69005 69934 66017 62904 59849 66501 NPV 322234 IRR 44.52 PMI I THINK THERE IS NO SUCH TERM IN CAPITAL BUDGETING EVALUATION. IT SHOULD BE PI = PROFITABILITY INDEX PI 3.30 (PV OF CASH INFLOWS/PV OF CASH OUTFLOWS) PI for in house catering 3.80 NPV for in house catering 784192 (There is an error in the earlier calculation)Related Questions
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