Financial Management and Control - DFA3021Y (5) Question 2 (25 marks Hugret Ltd is a company operating in the hotel industry and it owns two hotels, both operating as separate investment centre. The financial information of both hotels over the last four years is provided below. Hotel Casuana Sales (Rs million) Gross Profit (Rs million) Net Profit (Rs million) Net assets at start of the year (Rs million) 2013 295.15 120.10 15.50 150.00 2014 300.10 126.05 16.10 145.00 2015 310.20 141.15 17.50 140.00 2016 317.25 152.30 17.50 135.00 Hotel Westerina 2013 2014 2015 2016 Sales (Rs million) 400.20 398.10 350.10 335.10 Gross Profit (Rs million) 160.10 142.20 120.15 100.25 Net Profit (Rs million) 24.15 20.25 14.50 11.20 Net assets at start of the year (Rs million) 180.00 150.00 110.00 75.00 The performance of each hotel is measured according to a target annual Return on Investment (ROI) of 13%. Employees of each hotel are paid bonuses equivalent to 10% of their annual salary if their hotel's ROI exceeds the target of 13%. The cost of capital of Hugret Ltd is 10%. Required: (a) For each hotel, calculate the following for each of the last four years: (i) Gross Profit Margin (ii) Net Profit Margin (iii) Return on Investment [12 marks] (b) The manager of Hotel Casuana, Mr Thompson has expressed his opinion to the management of Hugret Ltd against ROI being the sole measure of performance. He has also stated that ROI is not an appropriate measure of performance. He has suggested that performance measurement must be based on Residual Income and bonus must be linked with positive yearly residual income. Calculate the yearly residual income for each hotel over the last four years. [4 marks) Discuss the financial performance of each hotel over the last four years and explain whether you agree with Mr Thompson. Your answer must be supported with your results in (a) and (b) and any other measures you believe to be appropriate. [9 marks] Page 2 of 9