Question D2 Beckenbauer Hotels Ltd owns and manages a 5 star eco friendly hotel situated in the Black Forest in Germany The hotel is marketed as a wellness and health retreat, within a beautiful surrounding The hotel has 400 identical rooms for which the standard rate of 80 per night is charged Occupancy rates have fallen below that which was envisaged when the hotel was built five years ago Cruyff Plc a multinational company, is shortly to open a local manufacturing plant and has approached the hotels management with a proposal that it takes 100 of the hotels rooms, in effect the whole of the top two floors of the hotel, to accommodate its staff and guests when they visit the plant Cruyff wishes to take over the rooms for a five year period starting on 1 January 2021 Under the proposal, Cruyff would employ its own staff to service and manage the rooms On the basis of past experience, and taking account of future developments in the market, the hotels management believes that the future average nightly demand over the next 5 years will be Demand Rooms demanded (daily) Probability Low 280 25 Medium 320 40 High 360 35 The hotel is open for 360 nights each year It is estimated that the variable costs of having a room occupied by a normal hotel guest average 10 of the room rate All staff costs are effectively fixed costs and would normally be expected to be 4 million each year If Cruyff Plcs proposal is accepted, 100,000 of these staff costs would be saved each year, by the hotel Beckenbauer Plcs cost of capital is 10 You have been provided with 10 discount factors Year 1 2 3 4 5 Discount Factor 0 909 0 826 0 751 0 683 0 621 REQUIRED a) Using net present value calculations, determine the minimum payment that Cruyff Plc would have to pay Beckenbauer, upfront on 1st January 2021 (year 0), for the proposal to be accepted This payment should compensate the hotel company for the loss of earnings from ordinary hotel guests in the 100 hotel rooms In your calculations of earnings from hotel guests, use the forecasts of medium demand of an average of 320 rooms per night

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Question D2 Beckenbauer Hotels Ltd owns and manages a 5 star eco-friendly hotel situated in the Black Forest in Germany. The hotel is marketed as

Question D2

Beckenbauer Hotels Ltd owns and manages a 5 star eco-friendly hotel situated in the Black Forest in Germany. The hotel is marketed as a wellness and health retreat, within a beautiful surrounding. The hotel has 400 identical rooms for which the standard rate of 80 per night is charged. Occupancy rates have fallen below that which was envisaged when the hotel was built five years ago.

Cruyff Plc a multinational company, is shortly to open a local manufacturing plant and has approached the hotels management with a proposal that it takes 100 of the hotels rooms, in effect the whole of the top two floors of the hotel, to accommodate its staff and guests when they visit the plant. Cruyff wishes to take over the rooms for a five-year period starting on 1 January 2021. Under the proposal, Cruyff would employ its own staff to service and manage the rooms.

On the basis of past experience, and taking account of future developments in the market, the hotels management believes that the future average nightly demand over the next 5 years will be:

Demand	Rooms demanded (daily)	Probability %
Low	280	25
Medium	320	40
High	360	35

The hotel is open for 360 nights each year.

It is estimated that the variable costs of having a room occupied by a normal hotel guest average 10% of the room rate. All staff costs are effectively fixed costs and would normally be expected to be 4 million each year. If Cruyff Plcs proposal is accepted, 100,000 of these staff costs would be saved each year, by the hotel. Beckenbauer Plcs cost of capital is 10%.

You have been provided with 10% discount factors

Year	1	2	3	4	5
Discount Factor	0.909	0.826	0.751	0.683	0.621

REQUIRED

a) Using net present value calculations, determine the minimum payment that Cruyff Plc would have to pay Beckenbauer, upfront on 1st January 2021 (year 0), for the proposal to be accepted. This payment should compensate the hotel company for the loss of earnings from ordinary hotel guests in the 100 hotel rooms. In your calculations of earnings from hotel guests, use the forecasts of medium demand of an average of 320 rooms per night.