NER is interested in purchasing a hotel property located in Muskoka, Ontario, Huntsville Heights Beach and Golf Resort Inc. (Huntsville Heights). Bill and Betty Gettysburg privately own this hotel property. Their asking price is $14 million for all of the shares of Huntsville Heights. Huntsville Heights is an extremely popular destination for Canadian and international travelers. The hotel is usually fully booked from June through October. Guests usually make reservations months in advance of their stay. During the peak season for 2016, the average room was $175 per night. During the off-peak season, the hotel is not usually fully booked. However, for the month of April 2016 the hotel was fully booked because of special events which resulted in $50,000 more revenue than normally earned.

Muscle Wedding

In June 2016, Huntsville Heights hosted the wedding and wedding reception of the daughter of a well-known actor, Martin Muscle. Muscle booked every room in the hotel for three nights which provided Huntsville Heights with revenue of $210,000. Muscle also paid a $200,000 fee to have the hotel close its golf course and hotel facilities to the public for the three day period which extended over a weekend. The golf course and pro shop would otherwise have generated revenue in the amount of $90,000. The Gettysburgs were surprised to receive an additional $500,000 payment from Muscle to thank them for their successful efforts in keeping the wedding details private. All of the amounts received for this wedding are included in reservation revenue on the income statement.

Golf Tournament

Huntsville Heights hosted a high profile, national tournament for golfers in May 2016 and the fee received by Huntsville Heights for hosting this tournament was $750,000. Huntsville Heights had to close the golf course to the public for seven days which resulted in lost revenue of $170,000. Each year, the tournament organizers seek out a different site to host the tournament. Several elite Canadian golf courses have hosted this tournament. To facilitate player and supporter accommodations, the golf courses for this tournament are usually affiliated with a large resort hotel, such as Huntsville Heights. With its 400 guest rooms and its quality golf course, Huntsville Heights met the requirements of the tournament organizers. The fee is included in golf fees and pro shop revenue on the income statement.

Personal Expenses

The Gettysburgs use Huntsville Heights to pay their personal expenses rather than taking a salary. During fiscal 2016, personal expenses paid by Huntsville Heights include:

The purchase of a new sports car for Betty that cost $100,000,

Travel costs in the amount of $225,000 to various exclusive resorts in Hawaii, Tahiti and South Africa during the winter months of 2016. Bill claims that is the best way to research new trends in the industry, and

An additional $420,000 in other personal expenses.

These expenditures are included in hotel operating costs on the income statement

As the Gettysburgs use the funds freely for personal use, they do not pay themselves a regular salary.

Land and Investments

Huntsville Heights purchased 300 acres of land at a cost of $1,000,000. Huntsville Heights was built on 200 acres of this land. The separate 100 acre parcel of land is undeveloped. The undeveloped land, which is located 40 kilometers from Huntsville Heights is estimated to be presently worth $3,000,000.

The special payment of $500,000 received by Huntsville Heights from Martin Muscle along with $500,000 of additional funds was invested in July 2016 in interest-bearing and equity investments. These investments have earned $25,000 in interest and dividends which are included in investment revenue on the income statement. The market values of the investments are unchanged from their costs as at December 31, 2016.

Valuation

As the 2016 annual net income is likely to be representative of future earnings, and the resort is not a capital intensive business, NER would like to value the company using a capitalized earnings approach. Melissa recently read in a trade journal that similar property investments yield a 20% return. She does not see any reason why this investment in Huntsville Heights would be any different.