A Financial Feasibility Analysis of Property Management System Upgrade at Hotel DelRay in Brussels

Background Information on Hotel DelRay, Brussels

Hotel DelRay is located at the heart of the city of Brussels, in Belgium. Brussels is a major hub for international politics, a home for several international organizations and diplomats, and a fortress for European Union Institutions. The importance of the city not only elevates the financial and economic infrastructure, also increases the volume of government and business travelers from all over the world. Thus, lodging establishments in the city of Brussels have recently been facing fierce local and international competition. DelRay, which is owned by Italian BD&T Hospitality Investment Company, has been in Brussels’ local lodging industry for the past twenty-five plus years. DelRay is one of the most popular and demanded hotels in Brussels by the international government institutions due to its strategic position. The hotel’s success is largely due to its great security procedures and they specialize in providing highly quality service based on international government protocols. 

Since its grand opening day, DelRay has had excellent records of growth figures, occupancy levels, and financial performance regardless of the time or the season of the year. However, in recent years, DelRay has started to observe inefficiencies in its operations and poor financial outcomes due to conventional and outdated operation systems in the property. Hence, the chairperson of BD&T has a recent discussion and a meeting with DelRay’s GM about this issue and the chairperson of BD&T has suggested an upgrade the existing but not fully effective property management system (PMS). A critical part of this upgrade project is to come up with the optimal capital allocation and acquisition plan and the financial feasibility assessment based on the project’s expected cash flows in the future. In this important meeting, BD&T and DelRay finance and accounting team has discussed and agreed on the project essentials as presented below. As UCF’s Rosen College graduate and the director of Finance at DelRay, you are in charge of this capital acquisition and feasibility study for the expansion project. 

1. Based on the given information in the “Estimation of the Net Investment Value (NINV) of the New PMS Upgrade” section, calculate the NINV of this upgrade project for the initial year.

2. Given this capital structure and acquisition details, estimate the Weighted Average Cost of Capital (WACC) for this upgrade project (40 pts.).

3. According to the financial projections for the following 4-year CF pro-forma, calculate the stream of CFs for this upgrade project (Hint: project assumptions and limitations are important to calculate CFs)

4. Based on NINV, WACC, and CFs results, perform a financial feasibility analysis with four capital budgeting methods as illustrated in “Financial Feasibility Analysis of the New PMS Technology” section 

5. Discuss your results and findings from NINV estimation, capital acquisition and WACC, flow of funds (CFs), and financial feasibility. Explain why is this worthwhile or not to invest in detail. In addition, explain the possible problematic areas and issues (i.e., cost of internal equity) to be improved for the project and for Delray’s long-term financial success. Do not forget to support your arguments. You can solve this question using the main equations of those methods or using financial calculator or excel solutions as introduced in the textbook