AC Hotels.

Investment in New Hotels

Preparation sheet (2 sessions)
Topic: Analysis and financing of an investment project
Objectives

Forecast and Analysis of P&L and Balance Sheet of an investment project

Cash flows calculation and return
Risks of the project and potential improvements
Other decision criteria (different from risks and return)

Material

Case: IESE F-760-E, AC Hotels. Investment in New Hotels

Textbook: Martinez Abascal, E. (2012) Finance for Managers, McGraw-Hill, Chapter 7
Investment project analysis and decision

Assignment (for 2 sessions)

Session #1
1. P&L and Balance Sheet forecast and analysis (Exhibit 1)
What is your opinion about the P&L? Analyze the Balance Sheet and its risks (focus on key
numbers). Would you invest in this project? If you do not like the P&L and the Balance Sheet,
then it is not worth to continue the analysis
2. Calculation of CF and return (Exhibit 2). How much can I make?
FCF or CF produced by the assets, before tax and without debt payments. Perpetuity in year
2015. Use EBIT of year 2015 with annual growth g = 2% and return required by AC Group
k = 12%. Calculate the IRR
CF for the shareholders that includes the CF of the hotel, minus tax and debt payments.
Perpetuity in year 2015: Net Income of year 2015 with g = 2% and k = 12%. Calculate the
IRR. How much of this return comes from the financing? And from the assets?
CF for AC Hotels Group. Remember that there are two shareholders in the Cantoblanco
project: the local partner and AC Hotels
Which return should you use to approve the project? The return of the project, the return to the
shareholders, or the return to AC Group?
3. Take a decision on the following points:
a) Should we charge to the Cantoblanco hotel the 2M of the options on land? If yes, should this
cost be charged to the hotel, the shareholders, or AC Group?
b) Should we include the 10% of cannibalization as a negative cash flow? If yes, should this cost
be charged to the hotel, the shareholders, or AC Group? For how long?
c) A part of the marketing cost, included in the P&L of the hotel is the 7% charged by the
headquarters. Should we include this as cost or not? If yes, should it be charged to the hotel,
the shareholders, or AC Group?
d) Analyze how your decisions on the previous points affect the return of the project, the
shareholders, and AC Group

Session #2
4. Risk of the project (or the How much can I loose? question)
a) Identify and quantify the mains risks: calculate the IRR of the project, the shareholders, and
AC Group in the following scenarios:
Base scenario: includes 2M for the options and cannibalizations as a negative CF for AC
Group, and the charges by the headquarters as a positive CF for the group
Occupancy: pessimistic scenario 55%, base 65%, optimistic 75%
Revenue per room: pessimistic scenario 115, base 130, optimistic 145
Sales growth: pessimistic scenario 3%, base 5%, optimistic 7%
Cost of the building: pessimistic scenario 11M, base 9M, optimistic 9M. Assume the
equity invested doesnt change in any scenario
Final cash flow or perpetuity: calculated with a growth rate g = 1% and g = 3%
b) Worse case scenario: calculate the return if everything goes wrong (taking always the negative
scenario). Overall, is the Cantoblanco project risky or safe?
5. Return enhancement or improvements of the project
a) What do you suggestrealisticallyto increase the return of the project? Look at the
components of the Cash Flows for AC Group. Specifically, look at the components of CF for
the shareholders: Net Income, Net Assets, Debt
b) What would be the impact of higher leverage on return and risks?
6. Other decision criteria to take into consideration
Strategic fit, size of the project, previous experience, etc.
7. Final decision
With all these considerations in mind, plus other that you may add, would you approve the
project? Assume the return required on invested capital by AC Group (k) equals 12%.