Write 4 page essay on the topic Managing Finance….Accounting.
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break even volume is equal to fixed costs divided by the differences of the unit sales price and the unit variable costs. Since no proportion is given as regards the sales of the hotel whether for single or double occupancy, the 70% occupancy rate of rooms is computed for single occupancy. This gives a break even sales volume of 25480. With the fixed costs being ‘5600000 and the unit variable costs at ’15, computing it algebraically, the unit sales price is ‘234.78 in order for the hotel to achieve break even.
Since the consortium requires 20% ROCE, the assumption that the whole ’50 million belongs to shareholder funds, without any other loans to finance it gives a required profit before interest and taxes of ‘10,000,000 in order to meet the ROCE.
After the PBIT has been determined, in order to compute for the unit selling price to achieve it, the hotel can use the break even equation. The PBIT will then be added to the fixed costs. Computing algebraically, the unit sales price in order to generate a PBIT of ‘10,000,000 is equal to ‘627.24.
Since depreciation is deducted from the contribution margin as part of the fixed costs, the PBIT figure is not the hotel’s annual operating cash flow. In order to get the hotel’s annual operating cash flow, the depreciation has to be added back. …
In order to get the hotel’s annual operating cash flow, the depreciation has to be added back. In reality, where there is presence of taxes, depreciation has some effect on the hotel’s total operating cash flow. Since no tax rate is stated, the assumption of a tax-free economy is made. By adding back the depreciation to the PBIT, which is essentially the net income, because of the absence of taxes, the total annual operating cash flow is ‘12,800,000.
After determining the annual operating cash flow of the hotel, the present value of these cash flows is determined. With the horizon of ten years, and the minimum weighted average cost of capital of 12% as the hurdle rate, the present value of the annual operating cash flows amount to ‘72,322.854.76.
After computing for the present value of annual operating cash flow, the initial outlay of ’50 million should be deducted to get the net present value. The net present value of this cash flow stream amounts to ‘22,322,854.76.
A positive net present value denotes an internal rate of return which is higher than the hurdle rate, thus it can be safely concluded that the IRR for this project is higher than 12%. The actual IRR of the cash flow stream is 22.13% for the ten year period.
D. Evaluate the possibility of a hotel charging ’80 per night on Fridays and Saturdays.
With Fridays and Saturdays offering a different rate compared to the other days, the capacity has to be revised, under the assumption of full occupancy again. This revision gives a volume of 7280: 2 days for every week, multiplied by 52 weeks, multiplied by 70 rooms. This will constitute one segment of the revenue.