The recently opened Grand Hyatt Wailea Resort and Spa on Maui cost $600mill abou

Question

The recently opened Grand Hyatt Wailea Resort and Spa on Maui cost $600mill about $800,000 per room, to build. Daily operating expenses average $135 a room if occupied and $80 a room if unoccupied (much of the labor cost of running a hotel is fixed) at an average room rate of $500 a night. A marginal tax of 40%, and a cost of capital of 11%, what year round occupancy rate do the Japanese investors who financed the Grand Hyatt Wailea require to break even in economic terms on their investment over its estimated 40 yr. life? What is the likelihood that this investment will have a positive NPV? Assume that the $450 million expense of building the hotel can be written off straight line over a 30yr period (the other$150 million is for the land which is not depreciable) and that the present value of the hotels terminal value will be $200million

Explanation / Answer

No of Rooms = Total Cost/Per room cost = 600,000,000/800,000

= 750 rooms

Room rate is per night basis. A year has 365 days.

Var cost per room per night = Total cost - Fixed cost = 135-80 = 55

Total Fixed cost per year = FC per room*No of rooms*No of nights

= 80*750*365days = $21,900,000

COnt per room = Room rate - Var cost per room

= 500-55 = $445 per night

Let No of Room nights for Breakeven be 'P'

Opportunity cost for Japanese Investor is Opportnity cost on his investment of $600M = 11%*600M = $66M

Dep using SLN method for 40 Yr life = 600M/40 = $1,500,000

Economic Profit = Total Income - Total Expenses - Opportunity Lost Cost

At Break Even, Eco profit = 0

So Total Income - Total Expenses - Opportunity Cost = 0

or Total Income - Total Expenses = Opportunity Cost = 66M

ie (P*COnt per room night - Fixed cost-Dep) = 66M

ie P*445 - 21,900,000-$1,500,000 = 66,000,000

ie P = (66000000+1500000+21900000)/445 = 200899 nights

As there are 750 Rooms, No of Nights = 200899/750 = 268

So Occupancy rate for Break even = 268/365 = 73.42% ..Ans (a)

What is the likelihood that this investment will have a positive NPV? Assume that the $450 million expense of building the hotel can be written off straight line over a 30 yr period (the other$150 million is for the land which is not depreciable) and that the present value of the hotels terminal value will be $200 million.

We have CF0 = $600M

ANnual Dep = $450M/30 = $15M

PV of Terminal Value = 200M

At 268 nights occupancy,

Annual PBT = No of Nights*No of rooms*COnt per night - Fixed cost-Dep

ie PBT = 268*750*445 - 21900000-15000000

ie PBT = $52,545,000

Less Tax 40% = $21,018,000

PAT = $31,527,000

Add Back Dep = 15,000,000

--------------------

OCF = $46,527,000

So OCF1 to OCF 30 = $46,527,000

So PV of OCF for 30Yrs @11% = PVA(11%,30) =8.6938

So PV of OCF = 8.6938*46527000 = $404,496,433

So NPV = PV of OCF + PV of Terminal CF - Initial Investment

ie NPV = $404,496,433 + 200,000,000 - 600,000,000

ie NPV = $4,496,433

So there is 73.52% likelihood for a Positive NPV.

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