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Hotel BelRay, Brussels New Property Management System (PMS) Acquisition & Installation Project Capital Allocation and Acquisition Plan & Financial Feasibility Study Background & History of DelRay! Hotel Del Ray is located at the heart of the city of Brussels, in Belgium. Brussels is a major hub for international politics, a home for several international organizations and diplomats, and a fortress for European Union Institutions. The importance of the city not only elevates the financial and economic infrastructure, also increases the volume of government and business travelers from all over the world. Thus, lodging establishments in the city of Brussels have recently been facing fierce local and international competition. DelRay, which is owned by Italian BD&T Hospitality Investment Company, has been in Brussels' local lodging industry for the past twenty-five plus years. DelRay is one of the most popular and demanded hotels in Brussels by the international government institutions due to its strategic position. The hotel's success is largely due to its great security procedures and they specialize in providing highly quality service based on international government protocols. Since its grand opening day, DelRay has had excellent records of growth figures, occupancy levels, and financial performance regardless of the time or the season of the year. However, in recent years, DelRay has started to observe inefficiencies in its operations and poor financial outcomes due to conventional and outdated operation systems in the property. Hence, the chairperson of BD&T has a recent discussion and a meeting with DelRay's GM about this issue and the chairperson of BD&T has suggested an upgrade the existing but not fully effective property management system (PMS). A critical part of this upgrade project is to come up with the optimal capital allocation and acquisition plan and the financial feasibility assessment based on the project's expected cash flows in the future. In this important meeting, BD&T and DelRay finance and accounting team has discussed and agreed on the project essentials as presented below. As UCF's Rosen College graduate and the director of Finance at DelRay, you are in charge of this capital acquisition and feasibility study for the expansion project. Project Assumptions & Limitations All of the estimations for the capital allocations and acquisition along with the financial feasibility will be based on the project assumptions and limitations as follows: . Due to the new technology investment, sales are expected to increase on an incremental basis of $10,000 increase every year for the next 4 years. All of the overhead costs (except for the new equipment cost) are estimated on an incremental basis of $1,500 increase every year for the next 4 years. Corporate tax bracket applied to DelRay is set at 40.00%. Deprecation of the new PMS technology is estimated on a straight-line method, which is set at $1,000 for the next 4 years. . . . Estimated cash flows (CFs) are measured on an after-tax basis. Cost of the new asset and the underlying overhead costs will be carried over to year 1 as shown in the 4-year financial projections and after-tax pro-forma CF structure. All project milestones are performed in accordance with the project completion schedule and there are no delays in project tasks. All transactions are closed on annual basis with no carry-over to subsequent years. The cost of capital estimation requires the cost of permanent sources of both short and long-term capital as explained later in the write-up. Cost of capital for this project is measured by the Weighted Average Cost of Capital (WACC). Estimation of the Net Investment Value (NIN) of the New PMS Upgrade: This upgrade project is going to give an opportunity to Hotel DelRay to replace the older PMS with the new technology so that the hotel can operate better to maximize their profit margins. Purchasing activities and processes of this new PMS technology will cost Delray $57,000. In addition to the cost of the new asset, the old PMS technology can be sold for $10,000 in the market with a book value of $8,000. Hence, after-tax salvage value from the replaced assets is established based on the difference between market and book value of the old asset along with the effect of tax. Suppose that the new PMS technology will not cause DelRay to increase its net working capital. Further, additional charges and estimations for this new PMS technology for the initial year (1" year) are highlighted as follows: Additional Staffing & Delivery Cost: $16,000 Shipping, Installation and Insurance Cost: $4,000 Maintenance Cost: $2,000 Design, Build, and Implementation of the New Technology: $3,000 . Q# 1 40pts. Full Name: Hotel DelRay New Property Management System (PMS) Acquisition & Installation Project Net Investment Value (NINV) Estimation for the New PMS Technology for the initial yhar. Cost of the New PMS System Additional Staffing & Delivery Cost Shipping, Installation & Insurance Cost Maintenance Cost Design, Build, & Implementation of the New Technology After-tax Salvage Value The Net Investment Value (NINV) Hotel BelRay, Brussels New Property Management System (PMS) Acquisition & Installation Project Capital Allocation and Acquisition Plan & Financial Feasibility Study Background & History of DelRay! Hotel Del Ray is located at the heart of the city of Brussels, in Belgium. Brussels is a major hub for international politics, a home for several international organizations and diplomats, and a fortress for European Union Institutions. The importance of the city not only elevates the financial and economic infrastructure, also increases the volume of government and business travelers from all over the world. Thus, lodging establishments in the city of Brussels have recently been facing fierce local and international competition. DelRay, which is owned by Italian BD&T Hospitality Investment Company, has been in Brussels' local lodging industry for the past twenty-five plus years. DelRay is one of the most popular and demanded hotels in Brussels by the international government institutions due to its strategic position. The hotel's success is largely due to its great security procedures and they specialize in providing highly quality service based on international government protocols. Since its grand opening day, DelRay has had excellent records of growth figures, occupancy levels, and financial performance regardless of the time or the season of the year. However, in recent years, DelRay has started to observe inefficiencies in its operations and poor financial outcomes due to conventional and outdated operation systems in the property. Hence, the chairperson of BD&T has a recent discussion and a meeting with DelRay's GM about this issue and the chairperson of BD&T has suggested an upgrade the existing but not fully effective property management system (PMS). A critical part of this upgrade project is to come up with the optimal capital allocation and acquisition plan and the financial feasibility assessment based on the project's expected cash flows in the future. In this important meeting, BD&T and DelRay finance and accounting team has discussed and agreed on the project essentials as presented below. As UCF's Rosen College graduate and the director of Finance at DelRay, you are in charge of this capital acquisition and feasibility study for the expansion project. Project Assumptions & Limitations All of the estimations for the capital allocations and acquisition along with the financial feasibility will be based on the project assumptions and limitations as follows: . Due to the new technology investment, sales are expected to increase on an incremental basis of $10,000 increase every year for the next 4 years. All of the overhead costs (except for the new equipment cost) are estimated on an incremental basis of $1,500 increase every year for the next 4 years. Corporate tax bracket applied to DelRay is set at 40.00%. Deprecation of the new PMS technology is estimated on a straight-line method, which is set at $1,000 for the next 4 years. . . . Estimated cash flows (CFs) are measured on an after-tax basis. Cost of the new asset and the underlying overhead costs will be carried over to year 1 as shown in the 4-year financial projections and after-tax pro-forma CF structure. All project milestones are performed in accordance with the project completion schedule and there are no delays in project tasks. All transactions are closed on annual basis with no carry-over to subsequent years. The cost of capital estimation requires the cost of permanent sources of both short and long-term capital as explained later in the write-up. Cost of capital for this project is measured by the Weighted Average Cost of Capital (WACC). Estimation of the Net Investment Value (NIN) of the New PMS Upgrade: This upgrade project is going to give an opportunity to Hotel DelRay to replace the older PMS with the new technology so that the hotel can operate better to maximize their profit margins. Purchasing activities and processes of this new PMS technology will cost Delray $57,000. In addition to the cost of the new asset, the old PMS technology can be sold for $10,000 in the market with a book value of $8,000. Hence, after-tax salvage value from the replaced assets is established based on the difference between market and book value of the old asset along with the effect of tax. Suppose that the new PMS technology will not cause DelRay to increase its net working capital. Further, additional charges and estimations for this new PMS technology for the initial year (1" year) are highlighted as follows: Additional Staffing & Delivery Cost: $16,000 Shipping, Installation and Insurance Cost: $4,000 Maintenance Cost: $2,000 Design, Build, and Implementation of the New Technology: $3,000 . Q# 1 40pts. Full Name: Hotel DelRay New Property Management System (PMS) Acquisition & Installation Project Net Investment Value (NINV) Estimation for the New PMS Technology for the initial yhar. Cost of the New PMS System Additional Staffing & Delivery Cost Shipping, Installation & Insurance Cost Maintenance Cost Design, Build, & Implementation of the New Technology After-tax Salvage Value The Net Investment Value (NINV)
