Montclair State University

Feliciano School of Business

HSET 366
Final Project
This project involves two parts:
Part 1. Operations Budget
Part 2. Capital Investment Project

INSTRUCTIONS
1 Each part is presented in a separate worksheet. Please read the instructions
carefully for each part and complete the required tasks as instructed. Part 1
must be completed before Part 2, because Part 2 uses information from Part 1.

2 Problems and calculations must be completed in Excel. You need to use

certain Excel functions such as NPV or IRR to complete some tasks.

3 Please use the space and tables/templates provided to complete the tasks and
ensure that your final results are easily noticable. You can bold or color the
final answers.

4 Your final submission in this project is this Excel document only. Please save
your excel document as "Final Project_Name". If you work as a group, one
submission should be made.

5 Grade Distribution:
Operations Budget 50% (10% of total grade)
Capital Investment Project 50% (10% of total grade)

Please complete your group information below.

First Last
Student Name 1 Ram Patel
Student Name 2
PART I. OPERATIONS BUDGET Table 2: 2022 Income Statement
Income Statement
December 31, 2022 Vertial Analysis
Sarah Tanford, the owner the Tanford Hotel, is in the process of preparing a five-years 2022 Actual
opearations budget for Tanford Hotel. Tanford Hotel is a 150-room city hotel. The hotel has
Sales Revenue
three revenue sources: (1) room department, (2) F&B deparment, and (3) the gift shops and
anxcillary services. Sarah and her management team have come up with the following Room Revenue 8,571,797 70.42%
revenue and expense predictionsfor the next three years. Using this information and the most F&B Revenue 3,428,719 28.17%
recent income statement of the company from December 2022, help Ms. Tanford and her Other Revenue 171,436 1.41%
management team prepare the five-years operations budget for Tanford Hotel. Total Sales Revenue 12,171,952 100.00%

Cost of Sales 3,408,146

Gross Profit 8,763,805

- The board of directors has established the major financial goal of generating a minimum net
income of 15% of sales.
- Room Revenue for the past three years are shown in Table 1 Operating Expenses
- The most recent income statement of the hotel is shown in Table 2. Salaries and Wages 1,923,168 40.7%
- Two new competitor hotels are planned to be opened in the same location. Employee Benefits 328,643 7.0%
Direct Operating Expenses 438,190 9.3%
Marketing 243,439 5.2%
Utility Services 523,394 11.1%
Table 1: Room Revenue in 2020 - 2022 Repairs and Maintenance 754,661 16.0%
Year 2020 2021 2022 Administrative and General 511,222 10.8%
Rooms Sold 45,169 45,443 45,716 Total Operating Expenses 4,722,717 100.0%
Occupancy % 82.5% 83.0% 83.5%
ADR $175.37 $181.33 $187.50 Property taxes 170,407 7.04%
Rooms Revenue $7,921,333 $8,240,299 8,571,797 Property Insurance 109,548 4.52%
Interest 486,878 20.10%
Depreciation 852,037 35.18%

Operating Income 2,422,218 67%

Taxes 508,666
Net Income 1,913,552 67%

1. Revenue Budgeting
The major findings and revenue projections for the next three years are as follows:

Item Analytical Findings

1. Room Revenue
a. ADR - Two new competitor hotels are planned to be opened in the same location.
- The three five-years' operating results indicate that ADR has increased 3.4% on average (year-over-year).
- The planning team forecasts that ADR will increase at the same rate (3.4%) for 2021-2023.
- Then, the ADR growth rate will slow down to 2.1% for the years 2026 and 2027 due to expected increase in market competition.

b. Occupancy - The occupancy of Tanford Hotel in 2022 was 83.50%. For the next five years, the occupancy is forecasted to be:

2023 2024 2025 2026 2027

ADR $193.88 $200.47 $207.28 $211.64 $216.08
Occupancy 85% 86% 87% 85% 84%
Room sold 46,538 47,085 47,359 46,264 45,990
Note: 150 rooms, The hotel operates for 365 days every year. 2024 is assumed to have 365 days.

2. F&B Revenue - F&B revenue is expected to increse 2% year-over-year for 2023-2025.

- Then, the growth rate is expected to decline to 1.8% for 2026 and 2027.
3. Other Revenue - Other revenue includes sales from the gift shops and anxcillary services.
- Other revenue is expected to increase 2% year-over-year.

2. Expenses Budgeting
The major findings and expense projections for the next three years are as follows:

Item Analytical Findings

1. Cost of Sales 2022 2023-2027
28.00% - No change is expected for the cost of sales percentage.
- So, cost of sales for the budgeted years will be the same percentage of total sales revenue as in 2022.
2. Operating Expenses
- All operating expenses will keep their cost percentages except marketing expense during the budget period.
- The management team wants to improve the marketing effort (4% of room revenue)
- Cost percentages are calculated by dividing individual account by total sales revenue (e.g. Salaries&Wages/Total Sales Revenue)
2022 2023-2027
a. Salaries and Wages % 15.80% Keep the % of room revenue at 2022 levels.
b. Employee Benefits 2.70% Keep the % of room revenue at 2022 levels.
c. Direct Operating Expenses 3.60% Keep the % of room revenue at 2022 levels.
d. Marketing 2.00% 4.00%
e. Utility Services 4.30% Keep the % of room revenue at 2022 levels.
f. Repairs & Maintenance 6.20% Keep the % of room revenue at 2022 levels.
g. Administrative & General 4.20% Keep the % of room revenue at 2022 levels.
3. Fixed Charges 2022 2023-2027
a. Depreciation $ 852,036.61 Depreciation expense is expected to remain the same. No change is expected.
b. Property Taxes 1.40% Keep their cost percentages (as a percentage of total sales revenue) during the budget period.
c. Property Insurance 0.90% Keep the cost % of total sales revenue during the budget period.
d. Interest expense $ 486,878.06 Interest expense is expected to remain the same. No change is expected.
e. Tax 21% Tax % does not change (21% of operating income)
 Tanford Hote
Income Statement
December 31, 2022

2022 Actual 2023

Sales Revenue
Room Revenue 8,571,797 9,022,554.75
F&B Revenue 3,428,719 3,497,293.13
Other Revenue 171,436 174,864.66
Total Sales Revenue 12,171,952 12,694,712.53

Cost of Sales 3,408,146 3,554,519.51

Gross Profit 8,763,805 9,140,193.02

Operating Expenses
Salaries and Wages 1,923,168 1,425,563.65
Employee Benefits 328,643 243,608.98
Direct Operating Expenses 438,190 324,811.97
Marketing 243,439 360,902.19
Utility Services 523,394 387,969.86
Repairs and Maintenance 754,661 559,398.40
Administrative and General 511,222 378,947.30
Total Operating Expenses 4,722,717 3,681,202.35

Property taxes 170,407 177,725.97

Property Insurance 109,548 114,252.41
Interest 486,878 486878.06
Depreciation 852,037 852036.61

Operating Income 2,422,218 3,828,097.62

Taxes 508,666 803,900.50

Net Income 1,913,552 3,024,197.12
Tanford Hotel
Budgeted Income Statement
For the Years 2023-2027

2024 2025 2026 2027

9,438,976.92 9,816,697.58 9,791,107.29 9,937,514.65

3,567,238.99 3,638,583.77 4,293,528.85 5,066,364.04
87,432.33 178,361.95 89,180.98 181,929.19
13,093,648.24 13,633,643.30 14,173,817.12 15,185,807.88

3,666,221.51 3,817,420.12 3,968,668.79 4,252,026.21

9,427,426.73 9,816,223.17 10,205,148.32 10,933,781.68

1,491,358.36 1,551,038.22 1,546,994.96 1,570,127.32

254,852.38 265,050.83 264,359.90 268,312.89
339,803.17 353,401.12 352,479.87 357,750.53
377,559.08 392,667.90 391,644.29 397,500.59
405,876.01 422,118.00 421,017.62 427,313.13
585,216.57 608,635.25 607,048.65 616,125.91
396,437.03 412,301.30 411,226.51 417,375.62
3,851,102.60 4,005,212.62 3,994,771.79 4,054,505.99

2,488.16 34.83 0.49 0.01

117,842.83 122,702.79 127,564.35 136,672.27
486878.06 486878.06 486878.06 486878.06
852036.61 852036.61 852036.61 852036.61

4,117,078.47 4,349,358.26 4,743,897.03 5,403,688.74

864,586.48 913,365.23 996,218.38 1,134,774.64

3,252,491.99 3,435,993.03 3,747,678.65 4,268,914.11
PART 2. CAPITAL BUDGET

Sarah Tanford is contemplating a technology investment project in Tanford Hotel that will include the acquisition of a brand-new reservation
system that will be bundled with a new property management system (PMS) and an upgrade of point-of-sale system (POS) used in the F&B
outlets (both hardware and software). The new reservation system is expected to extend the sales channels. The economic life of this project
is estimated to be five years and no salvage value is expected from the disposition of the assets at the end of their economic life. The IT
department has currently received an offer from a reputable IT vendor to the hotel industry. The cost break-down of this technology
investment is provided in Table 1.

Table 1. Investment Information

One Time Cost
Initial Investment Cost $ 720,000

Table 2. Depreciation Consideration

Salvage value $0.00
Life for tax purposes 5 years

The management team of Tanford Hotel evaluates the feasibility of this technology project. They predict that room sales revenue can be
increased by 3% each year becasue of the ability to reach out to new customers with the new researvation system.

The estimated expenses for the next 5 years would be the following:
Table 3. Project Expenses
2023 2024 2025 2026 2027
Depreciation $ 144,000 $ 144,000 $ 144,000 $ 144,000 $ 144,000
Training and technical support 36,000 36,000 36,000 36,000 36,000
Maintenance and updates 36,000 36,000 36,000 36,000 36,000

Tanford Hotel uses accet/reject criteria for the invesment decision as below:

Table 4. Accept/Reject Criteria

Payback = 3 years
IRR = 16%
NPV >0
PI >1

Requirements:
1. Using budgeted income statements in Part 1, determine the annual net income.
Note: You have to use "revenue incremental" for the project revenue.
Tanford Hotel's tax rate is 21%
Net Income = Revenue incremental - expenses - taxes
2. Using the informartion provided, determine the annual net cash flows from the proposed investment.
3. Determinethe NPV, IRR, PI and payback period.
Note: Discount rate is 12%
of a brand-new reservation
m (POS) used in the F&B
onomic life of this project
conomic life. The IT
f this technology

sales revenue can be

Task 1. Estimate Incremental Revenue, Expenses, and Annual Incomes
2023 2024 2025 2026
Revenue forecase $ 9,022,554.75 $ 9,438,976.92 $ 9,816,697.58 $ 9,791,107.29
Incremental revenue $ 270,676.64 $ 283,169.31 $ 294,500.93 $ 293,733.22
Project expenses
Depreciation $ 144,000 $ 144,000 $ 144,000 $ 144,000
Training and technical support 36,000 36,000 36,000 36,000
Maintenance and updates 36,000 36,000 36,000 36,000
Pretax Income $ 54,676.64 $ 67,169.31 $ 78,500.93 $ 77,733.22
Taxes (21%) $ 11,482.09 $ 14,105.55 $ 16,485.19 $ 16,323.98
Net Income $ 43,194.55 $ 53,063.75 $ 62,015.73 $ 61,409.24

Task 2. Determine the Annual Cash flow.

2023 2024 2025 2026
Net Income $ 43,194.55 $ 53,063.75 $ 62,015.73 $ 61,409.24
Add: Depreciation $ 144,000.00 $ 144,000.00 $ 144,000.00 $ 144,000.00
Total $ 187,194.55 $ 197,063.75 $ 206,015.73 $ 205,409.24

Task 3. Determine Payback period, NPV, IRR, PI and Payback period

Discount Rate k= 0.12 Payback Period
Cost C= $ (720,000.00)
Annual Cash Flow 1 $ 187,194.55 $ (907,194.55)
2 $ 197,063.75 $ (917,063.75)
3 $ 206,015.73 $ (926,015.73)
4 $ 205,409.24 $ (925,409.24)
5 $ 208,879.10 $ (928,879.10)
Value Decision
1 NPV= ($61.17) Accept the project
2 IRR= 12% Accept the project
3 PI= $1.00 Accept the project
4 Payback= $3.00 Accept the project
Taks 4. Based on the analysis, make a decision on the investment.
Decision: Accept the project
 2027
$ 9,937,514.65
$ 298,125.44

$ 144,000
36,000
36,000
$ 82,125.44
$ 17,246.34
$ 64,879.10

2027
$ 64,879.10
$ 144,000.00
$ 208,879.10
Accept the project
Reject the project