Five Seasons Hotel is a chain with 10 hotels. Strategically, the chain implement
ID: 2778934 • Letter: F
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 $50,000 a year. This staffing level implies a certain service level, which together with the rack rate and discount, determines the chain’s average occupancy rate—the percent of available rooms sold—in this approximate way:
Chain-wide average occupancy rate = 0.01´numberOfEmployeesPerHotel
- ( 0.0015 ´base Price ) + ( 0.01 ´ discount),
subject to a maximum of 100% and minimum of 0% (base Price and discount are expressed in [$]). The company operates 365 nights a year.
What is the ROIC?
Explanation / Answer
ROIC(Return on capital Ivestment = Net Income -Dividend/Total Capital investment in land= $150 million investment in building and furnishing =$500 million rate per room =$200 per night Discount =$ 30 rooms=150 meterial cost to run one hotel =$1 million there for cost for 10 hotel=$10 million no of staff =58 compensation per staff=$50000 total compensation for staff=$2900000 Chain average occupancy rate=(.01 x58)-(.0015 X200)+(.01 X30)=2.72% Calculation of Net Income Income from Room =170 X150 X365X10 =93075000 i.e 93.075 meterial cost=10 million staff compensation =29 million total expenses=39 million Total capital =650 million ROIC =93.075-39/650 =8.32%
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