- Calculate the proposed investments return on investment and payback period. (Ignore the TVM.)
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Projected Costs There were three main revenue generators at Red Spruce: food and beverage operations, recreation activities, and room reservations. Since food and beverage revenue and recreation revenue depended primarily on room occupancy, all three revenue generators would be affected by the suite renovation. Therefore, Ellis estimated the projected revenue, variable costs, labour costs and operating expenses during the renovation period, as shown in Exhibit 4. While the revenues from food and beverage and from recreation activities were expected to stay at the same dollar amount per room per night, all room and occupancy rate changes were calculated using 2013 levels as a base. Room rates would increase by 4 per cent if the renovation was pursued and would decrease by 1 per cent if there were no renovations. Similarly, occupancy rates would change as well. If the renovation was pursued, room nights sold would increase by 3 per cent, and if there were no renovations, room nights sold would decline by 1 per cent. Even though the cottages would not be renovated, their rental rates would be increased by the same percentages. Facilities management costs also varied. If the renovation was pursued, costs would decrease by 3 per cent, whereas no renovations would increase costs by 2 per cent. Facilities management expenses, not including the costs listed in Exhibit 4, amounted to $136,053 in 2013. Red Spruce's food and beverage manager purchased all food inventory on credit and paid suppliers within 14 days. Inventory turned over quickly, so Ellis considered any increase in food inventory on hand to be negligible. Most guests paid all room fees in full at the end of their stay; however, Wakeman extended credit terms of 30 days to larger groups that visited the resort. Larger group stays accounted for 45 per cent of the resort's entire room revenue. Ellis projected that other revenues and costs would grow with inflation, but he did not want to account for any additional growth when calculating the project's return on investment and payback period. EXHIBIT 3: RENOVATION COSTS Cost Item Design Shower stalls Bathroom tiles Bathroom (other) Dishwashers Kitchen (other) Lighting and ceiling fixtures Art Window treatment Upholstery Cased goods Other furniture Delivery and set-up Construction Total $ 22,600 61,698 44,916 118,885 18,730 247,188 54,447 16,950 49,720 78,812 133,484 45,672 28,024 169.500 $ 1.090,626 Source: Company files EXHIBIT 4: EXISTING OPERATIONS ASSUMPTIONS Recreation Activities Revenue (per room night sold) Variable costs % of corresponding revenue) Labour costs" (% of corresponding revenue) Operating expenses." (% of corresponding revenue) Food & Beverage Operations $165 29% 43% 4.4% $12 10% 87% 13% 20 Other revenue" (% of room revenue) Variable costs Labour costs (per room night sold) Operating expenses (per room night sold) Room Reservations 8% Negligible $112 $15 Source: Company files EXHIBIT 1: INDUSTRY STATISTICS - RED SPRUCE VERSUS DIRECT COMPETITORS (2012) Metric Number of rooms available (supply) Number of rooms booked (demand) Occupancy Room rate REVPAR Source: Company files Red Spruce 11,311 6,818 61.0% $206 $124 Industry" 294,8302 135,296 45.9% $22215 $1026 EXHIBIT 2: ROOM RATE AND OCCUPANCY LEVELS 2012 Year Room nights available" Room nights sold Occupancy % Average daily rate 2011 11,830 6,362 53.8% $204 11,311 6,818 60.3% $206 2013 11,830 7,013 59.3% $213 Source: Company files Projected Costs There were three main revenue generators at Red Spruce: food and beverage operations, recreation activities, and room reservations. Since food and beverage revenue and recreation revenue depended primarily on room occupancy, all three revenue generators would be affected by the suite renovation. Therefore, Ellis estimated the projected revenue, variable costs, labour costs and operating expenses during the renovation period, as shown in Exhibit 4. While the revenues from food and beverage and from recreation activities were expected to stay at the same dollar amount per room per night, all room and occupancy rate changes were calculated using 2013 levels as a base. Room rates would increase by 4 per cent if the renovation was pursued and would decrease by 1 per cent if there were no renovations. Similarly, occupancy rates would change as well. If the renovation was pursued, room nights sold would increase by 3 per cent, and if there were no renovations, room nights sold would decline by 1 per cent. Even though the cottages would not be renovated, their rental rates would be increased by the same percentages. Facilities management costs also varied. If the renovation was pursued, costs would decrease by 3 per cent, whereas no renovations would increase costs by 2 per cent. Facilities management expenses, not including the costs listed in Exhibit 4, amounted to $136,053 in 2013. Red Spruce's food and beverage manager purchased all food inventory on credit and paid suppliers within 14 days. Inventory turned over quickly, so Ellis considered any increase in food inventory on hand to be negligible. Most guests paid all room fees in full at the end of their stay; however, Wakeman extended credit terms of 30 days to larger groups that visited the resort. Larger group stays accounted for 45 per cent of the resort's entire room revenue. Ellis projected that other revenues and costs would grow with inflation, but he did not want to account for any additional growth when calculating the project's return on investment and payback period. EXHIBIT 3: RENOVATION COSTS Cost Item Design Shower stalls Bathroom tiles Bathroom (other) Dishwashers Kitchen (other) Lighting and ceiling fixtures Art Window treatment Upholstery Cased goods Other furniture Delivery and set-up Construction Total $ 22,600 61,698 44,916 118,885 18,730 247,188 54,447 16,950 49,720 78,812 133,484 45,672 28,024 169.500 $ 1.090,626 Source: Company files EXHIBIT 4: EXISTING OPERATIONS ASSUMPTIONS Recreation Activities Revenue (per room night sold) Variable costs % of corresponding revenue) Labour costs" (% of corresponding revenue) Operating expenses." (% of corresponding revenue) Food & Beverage Operations $165 29% 43% 4.4% $12 10% 87% 13% 20 Other revenue" (% of room revenue) Variable costs Labour costs (per room night sold) Operating expenses (per room night sold) Room Reservations 8% Negligible $112 $15 Source: Company files EXHIBIT 1: INDUSTRY STATISTICS - RED SPRUCE VERSUS DIRECT COMPETITORS (2012) Metric Number of rooms available (supply) Number of rooms booked (demand) Occupancy Room rate REVPAR Source: Company files Red Spruce 11,311 6,818 61.0% $206 $124 Industry" 294,8302 135,296 45.9% $22215 $1026 EXHIBIT 2: ROOM RATE AND OCCUPANCY LEVELS 2012 Year Room nights available" Room nights sold Occupancy % Average daily rate 2011 11,830 6,362 53.8% $204 11,311 6,818 60.3% $206 2013 11,830 7,013 59.3% $213 Source: Company files
