Comparing Management And Franchise Agreements our valuation of the management agreement for the new Hungerford Hotel, we determined that the contract had a

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our valuation of the management agreement for the new Hungerford Hotel, we determined that the contract had an NPV of $17,110 per room. This is the value of the brand services and of the management services. In our valuation of the franchise fees for the Hillwood Hotel, we determined the franchise had an NPV of $12,216 per room. This is the value of the brand services.

Based on this information about these agreements, create a post that answers the following questions:

  1. Is the difference in NPV, roughly $5,000 per room, adequate compensation for the responsibility of operating the property?
  2. Is the intellectual property properly valued in each instance?
  3. What conclusions can you make about operating a hotel system under franchise agreements vs. under management agreements?

Instructions

SHA616: Valuing Hotel Intellectual Property and Structuring the Capital Stack
School of Hotel Administration, Cornell University
Check: Valuing the Management Agreement
Instructions:
Use this spreadsheet to answer questions about valuing the management agreement for the Hungerford Hotel.

Copyright © 2017 eCornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners.

MFeeValuation

Hotel Management Fee Calculation and Valuation (all figures $’000)
Overall Assumptions for Analysis Overall Assumptions for Analysis
OperatorKey Money Contribution ($’000) $0 Base Fee (% of Hotel Revenues) 3.25%
Multiple for Net Base Fees at End of Analysis Period 6.0 Operating Expenses of Management Company (% of Basic Fee) 75%
Multiple for Incremental Fees at End of Analysis Period 4.5 Incentive Fee (% of CF after 10% Owner’s Priority -$6.6M) 26.00%
Multiple for Net System Reimbursible Expenses at End of Analysis Period 6.0 System Reimbursible Expenses as a Percent of Total Revenues 2.75%
Discount Rate for Net Basic Fees 10% System Reimbursible Expenses – Costs (% of SRE Revenues) 100%
Discount Rate for Incentive Fees 16% Number of Shares Outstanding (‘000) 100,000
Discount Rate for Net System Reimbursible Expenses 10% Number of Rooms 300
Cash Value
Over Analysis Present Discount Value
Annual Flows from Operations Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Period Value Rate per Room
A. Hotel Revenues $ 19,640 $ 23,884 $ 26,115 $ 26,940 $ 27,746 $ 28,534 $ 29,343 $ 30,076 $ 30,830 $ 31,598 $274,706
B. Hotel GOP before deducting Management Fees $5,163 $8,129 $ 9,576 $ 9,944 $ 10,279 $ 10,587 $ 10,904 $ 11,154 $ 11,413 $ 11,670 $98,819
C. Annual Debt Service ERROR:#REF! ERROR:#REF! ERROR:#REF! ERROR:#REF! ERROR:#REF! ERROR:#REF! ERROR:#REF! ERROR:#REF! ERROR:#REF! ERROR:#REF! ERROR:#REF!
Revenues From Management Contract
Base Fee Calculation
Hotel Revenues $19,640 $23,884 $26,115 $26,940 $27,746 $28,534 $29,343 $30,076 $30,830 $31,598
Times: Base Fee Percentage 3.25% 3.25% 3.25% 3.25% 3.25% 3.25% 3.25% 3.25% 3.25% 3.25%
Equals: Base Fee $638 $776 $849 $876 $902 $927 $954 $977 $1,002 $1,027 $8,928 $5,307.08 10% $17.69
Incentive Fee Calculation
Adjusted GOP (Line B under “Annual Flows” less Base Fee) $4,525 $7,353 $8,727 $9,068 $9,377 $9,660 $9,950 $10,177 $10,411 $10,643
Less: Owner’s Priority of $6.6 Million $6,600 $6,600 $6,600 $6,600 $6,600 $6,600 $6,600 $6,600 $6,600 $6,600
Equals: Cash Flow After Owner’s Priority ($2,075) $753 $2,127 $2,468 $2,777 $3,060 $3,350 $3,577 $3,811 $4,043
Times: Incentive Fee Percentage 26.00% 26.00% 26.00% 26.00% 26.00% 26.00% 26.00% 26.00% 26.00% 26.00%
Equals: Incentive Fee $0 $196 $553 $642 $722 $796 $871 $930 $991 $1,051 $6,751 $2,615.26 16% $8.72
System Reimbursible Expenses Calculation
Hotel Revenues $ 19,640 $ 23,884 $ 26,115 $ 26,940 $ 27,746 $ 28,534 $ 29,343 $ 30,076 $ 30,830 $ 31,598
Times: SRE Fee Percentage 2.75% 2.75% 2.75% 2.75% 2.75% 2.75% 2.75% 2.75% 2.75% 2.75%
Equals: System Reimbursible Expenses – Revenues $540 $657 $718 $741 $763 $785 $807 $827 $848 $869 $7,554 $4,490.61 10% $14.97
Total Revenues $0 $1,178 $1,629 $2,120 $2,258 $2,387 $2,508 $2,632 $2,734 $2,841 $2,947 $23,234 $12,412.94 $41.38
Expenses & Costs of Management Contract
Operating Expense Calculation
Basic Fee $638 $776 $849 $876 $902 $927 $954 $977 $1,002 $1,027
Times: Operating Expenses as % of Basic Fee 75% 75% 75% 75% 75% 75% 75% 75% 75% 75%
Equals: Operating Overhead $479 $582 $637 $657 $676 $696 $715 $733 $751 $770 $6,696 $3,980.31 10% $13.27
Impact Calculation
Total of Base Impacts $0 $30 $31 $31 $33 $34 $34 $35 $37 $38
Total of Incremental Impacts $0 $24 $25 $27 $27 $28 $29 $29 $30 $31
Total Impact $0 $54 $56 $58 $60 $62 $63 $64 $67 $69 $553 $315.77 10% $1.05
System Reimbursible Expenses – Costs
System Reimbursible Expenses – Revenues $540 $657 $718 $741 $763 $785 $807 $827 $848 $869
Times: SRE – Costs as Percentage of SRE Revenues 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
System Reimbursible Expenses – Costs $540 $657 $718 $741 $763 $785 $807 $827 $848 $869 $7,554 $4,490.61 10% $14.97
Key Money Contribution $0 $0 $0.00 $0.00
Total Expenses and Costs $0 $479 $636 $693 $715 $736 $758 $778 $797 $818 $839 $7,249 $8,786.69 ` $29.29
Net Annual Flows $0 $700 $993 $1,427 $1,544 $1,651 $1,750 $1,853 $1,937 $2,022 $2,108 $15,985 $3,626.25 $ 12.088
Pre-Tax Earnings Per Share $ – 0 $ 0.007 $ 0.010 $ 0.014 $ 0.015 $ 0.017 $ 0.018 $ 0.019 $ 0.019 $ 0.020 $ 0.021 $ 0.160
End of Analysis Period Valuations
Net Base Fee Value at End of Analysis Period $1,126 $1,126 $434.28 10%
Incentive Fee Value at End of Analysis Period $4,730 $4,730 $1,072.30 16%
Net System Reimbursible Expenses Value at End of Analysis Period $0 $0 $0.00 10%
Total End of Analysis Period Values $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $5,857 $5,857 $1,506.58 $5.02
Total Present Value Total Present Value and Value per Room $ 5,132.83 $ 17.109

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