This case is a continuation of the Caesars Entertainment Corporation serial case that began in Chapter 1. Refer to the introductory story in Chapter 1 (see page 43) for additional background. (The components of the Caesars serial case can be completed in any order.)
Caesars Palace® Las Vegas made headlines when it undertook a $75 million renovation. In mid-September 2015, the hotel closed its then-named Roman Tower, which was last updated in 2001, and started a major renovation of the 567 rooms housed in that tower. On January 1, 2016, the newly renamed Julius Tower reopened, replacing the Roman Tower. In addition to renovating the existing rooms and suites in the former Roman Tower, 20 guest rooms were added to the Roman Tower.
Assume that the annual fixed operating costs for the Julius Tower will be $2,390,000 and that the variable cost per hotel room night after the renovation is $27. Also assume that maintenance costs in the seventh year, after the renovation, will be $17,000,000; maintenance costs, twelve years after the renovation, are estimated at $25,000,000. The towers in Caesars Palace® Las Vegas are generally renovated once every fifteen years. Assume the renovated tower's room rate is $149 per night, and 91.2% occupancy is expected on average.
Questions
1. In number of years, what is the payback period of the renovation? Ignore the maintenance costs in the seventh and twelfth years for the purpose of the payback calculation.
2. What is the net present value (NPV) of this investment? Assume an interest rate of 10%.
3. What qualitative factors did Caesars's management likely consider when making the decision to renovate the hotel?