Lighting the way at the Manor house hotel

Andre and Melissa Barnore met while attending a prestigious. East Coast business School. After graduation, Andra worked for several years in Hospitality management with a number of well- known luxury hotel brands. Melissa worked in business development with a real estate investment trust ( REIT) where she focused on new property acquisitions,

In early 2012, a;; of the pieces began to come together. Melissa had come across a mid-rise 1930s hotel building in the heart of Chicago's Gold Coast. The 100 room hotel had numerous classic art deco design elements. However, significant refurbishment would be needed in order to realize the Barnores' goal of re-positioning the hotel as a boutique offering that would cater to a high-end clientele. Fortunately, by making use of their extensive contact in the Chicago real-estate industry, they had been able to obtain financing for the hotel purchase and remodeling project from a large publicly-traded REIT. The barmores hoped to complete the remodeling and to re-open the newly named Manor House Hotel in time for Holidays.

Lighting Technology

Until the 1800s, people relied on fire fed by combustible materials such as wax, whale oil, or kerosense to creative visible light, and then in 1752, the world began to change rapidly after Bejnamin Franklin's famous kite flying experiment ushered in the electrical age. By 1802, Humphry Davy had created the first incandescent light. However, it was not until 1879 that Thomas Edison perfected an incandescent light bulb that could be commercialized. The incandescent light bulb is still with us today, but several newer technologies have emerged that may soon displace the incandescent bulb.

Incandescent light blubs

Incandescent bulbs produced light by running electric current through a filament wire that was resistant to the flow of electricity. The resistance caused the filament to heat up until glowed, releasing visible light. The process known as incandescence produced around 15 lumens if light per watt of electricity. A typical incandescent bulb cost around fifty cents and has a rated life of 1,000 hours- meaning that after 1,000 hours of use 50% of bulbs failed when the filament burned out(see an Exhibit 2 ) incandescent bulbs were not particularly energy efficient only 10% of the energy input of an incandescent blub was converted into visible light with the rest being converted into heat. However incandescent blubs produced light that most people found pleasing because it closely mimicked sunlight and rendered colors accurately. As a result, incandescent bulbs still comprised roughly 75% of the market for light bulbs in 2012, even after 130 years of market dominance.

Compact Fluorescent Bulbs

Compact fluorescent bulbs (CFL) were introduced in the late 1970s in response to rising energy costs and comprised roughly 20% of the light bulb market by 2012. CLFs created light by running electric current through curled glass tubes that contained mercury vapor. The current excited the vapor, causing it to emit ultraviolet radiation. This ultraviolet radiation was then converted to visible light by a phosphorous coating on the inside pf the tubes in a process known as fluorescence, because CFLs had no heated filament they tended to last far longer, with rated lives ranging from8,000 to 12,000 Hours See the Exhibit 2, furthermore, CFLs were fairly inexpensive a CFL that produced the same amount of light as a 60-watt incandescent bulb cost about $5 in 2012 despite these positive attributes, CLFs had a negative reputation in the Market. Specifically many people thought that CFLs flickered or buzzed produced light that rendered colors poorly, and took time to warm up to full brightness. Finally CFLs contained small amounts of mercury, which created some disposal concerns.

Light Emitting Diode Bulbs

Light emitting diode (LEDs) created light through a process known as electroluminescence whereby electrons were forced to glow though small holes, which caused the release of photon LEDs were first discovered in 1907 when an experimenter at macaroni labs found that certain crystals entitled light when an electric current was run through them. It was not until the 2000s, however that LEDs found their way into general lighting applications. Although the materials used in LEDs were rapidly improving the technology already allowed for the bulbs that were very energy efficient, closely mimicked the light quality of incandescent bulbs, and turned on instantly. LEDs did not burn out but slowly dimmed over time. Thus, LEDs were assumed to be at the end of their rated life when they generated 70% if their initial lumen output, which for most LED bulbs was around 24,000 hours ( see exhibit 2 ) while their performance was quite impressive, an LED that produced the same amount of light as a 60-watt incandescent blub was still expensive, selling for between $10 and $25 in 2012, however, prices for LEDs were projected to fall by 25% per year until 2015, and then by 12.5% per year until 2020. Further, LED energy efficiency was projected to rise form 65 lumens per watt currently to over 150 by 2020 accordingly, which comprised less than 5% of the lighting market in 2012, was expected to rise to over 70% of the market by 2020.

Making a Choice

Based on the data provided in Exhibit 1 and 2, the Baromores had decided to begin their analysis by considering the following alternative, Exclusive use of 60 watt incandescent bulbs, exclusive use of 60 watt equivalent CFL blubs and exclusive use of 60 watt equivalent LED bulbs.

In coming to a decision, the Barmoes knew that the best choice would be the alternative which offered the lowest cost in present value terms without compromising the hotel's quality standards. For reasons of practicality, the Barmores had decided that any purchase costing less than $20,000 would be immediately expenses, rather than being depreciated over the estimated life of the investment. However they knew that reaching a decision would require consideration of more than the initial purchase price of the bulbs. Specifically, the Baromores knew they also needed to forecast the annual stream of expected future costs for each of the alternative. In this regards, the Barmores anticipated that the price of electricity, the price of new incandescent blubs, and the replacement labor cost for incandescent blubs would each grow in the line with overall inflation, which was expected to average 2% per annum going forward. For simplicity, the Barmores had also decided to assume that all blubs would have to be replaced as soon as they reached their rated lifetime. Furthermore, the Baromores had recently heard about the near-term possibility of a permanent one-time 20% rate hike by their local utility. As a result, they were interested in whether their choice might be affected by such a near term jump in utility rates.

Finally, after consulting with the publicly traded REIT that was providing the financing for the project, the Barmores had determined that the appropriate discount rate for the guestroom lighting purchase and other capital investments in the Manor Hotel was 10%. Specifically, analysts at the REIT had determined that its base of broadly diversified investors was currently requiring a 10% return for investments with similar risks and a similar time horizon to investments in hotel development.