Five Seasons Hotel is a chain with 10 hotels. Strategically, the chain implement

Question

Five Seasons Hotel is a chain with 10 hotels. Strategically, the chain implements a cookie-cutter approach to building and running its hotels, in that all hotels are practically identical. Five Seasons invested $150 million in acquiring the land for all hotels and $500 million in building and furnishing the 10 hotels to a guest-ready stage. Each hotel has 150 rooms. Each room has a rack rate of $200 per night but the hotel gives an average of discount of $30 per night off this base price. Each hotel costs $1 million in materials to run, and is staffed by 58 employees, each paid an average compensation of $50,000 a year. This staffing level implies a certain service level, which together with the rack rate and discount, determines the chain’s average occupancy rate—the percent of available rooms sold—in this approximate way:

Chain-wide average occupancy rate = 0.01x NumberOfEmployeesPetrHotel - ( 0.0015 * base Price ) + (0.01 * discount)

NOTE: Subject to a maximum of 100% and minimum of 0% (base Price and discount are expressed in [$]).

NOTE: The company operates 365 nights a year

. A. What is the ROIC?

B. Reducing the number of employees reduces staffing costs, but it also reduces the occupancy rate when service level drops. What is the ROIC if Five Seasons reduces the number of employees to 50 per hotel?

Explanation / Answer

Invested capital Land cost 150000000 Total Bldg.& Furnising costs 500000000 Total investment for 10 hotels 650000000 Invested capital for 1 Hotel 65000000 (650000000/10) A. Chain-wide average occupancy rate = 0.01x NumberOfEmployeesPerHotel - ( 0.0015 * base Price ) + (0.01 * discount) So,Occupancy for 1 hotel= (0.01*58)-(0.0015*200)+(0.01*30) 0.58 ie. 58% A.              Revenues per hotel Rack rate(200-30) 170 Per room Total Revenue for 365 nights@ occupancy rate of 58%(150*58%*170*365)    5398350 Costs per hotel: Materials 1000000 Staff salaries(58*50000) 2900000 Total costs 3900000 Net revenue for each hotel (5398350-3900000) 1498350 ROIC= Net return/Capital invested(per hotel) 1498350/65000000 0.0230515 2.31% B. Chain-wide average occupancy rate = 0.01x NumberOfEmployeesPerHotel - ( 0.0015 * base Price ) + (0.01 * discount) So,Occupancy for 1 hotel = (0.01*50)-(0.0015*200)+(0.01*30) 0.5 ie. 50% B.              Revenues per hotel Rack rate(200-30) 170 Per room Total Revenue for 365 nights@ occupancy rate of 50%(150*50%*170*365)    4653750 Costs per hotel: Materials 1000000 Staff salaries(50*50000) 2500000 Total costs 3500000 Net revenue for each hotel (4653750-3500000) 1153750 ROIC= Net return/Capital invested 1153750/65000000 (per Hotel) 0.01775 1.78%

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