Harvard Case - Hotel Rhythm Lonavala: Financial Feasibility of Commercial Real Estate
"Hotel Rhythm Lonavala: Financial Feasibility of Commercial Real Estate" Harvard business case study is written by Prashant Das, Ashish Gupta. It deals with the challenges in the field of Accounting. The case study is 15 page(s) long and it was first published on : Feb 6, 2023
At Fern Fort University, we recommend that Hotel Rhythm Lonavala proceed with the proposed expansion project, subject to careful financial planning and risk mitigation strategies. This recommendation is based on a comprehensive analysis of the hotel's current financial performance, the potential market demand, and the projected profitability of the expansion.
2. Background
This case study focuses on Hotel Rhythm Lonavala, a successful mid-range hotel seeking to expand its operations by adding 50 new rooms. The hotel is located in Lonavala, a popular tourist destination near Mumbai, India. The expansion project involves significant capital investment, and the management team is seeking to determine its financial feasibility.
The main protagonists are:
- Mr. Sunil Shetty: The owner and managing director of Hotel Rhythm Lonavala, who is passionate about growing the business.
- Mr. Amit Shah: The hotel's finance manager, responsible for financial planning and analysis.
- Ms. Priya Patel: The marketing manager, tasked with understanding market demand and developing promotional strategies.
3. Analysis of the Case Study
To evaluate the financial feasibility of the expansion project, we conducted a comprehensive analysis using a combination of financial statement analysis, activity-based costing, and break-even analysis.
Financial Statement Analysis: We analyzed the hotel's historical financial statements including the balance sheet, income statement, and cash flow statement. This analysis revealed a strong track record of profitability and a healthy financial position.
Activity-Based Costing: We used activity-based costing to determine the true cost of providing hotel services. This approach allowed us to identify cost drivers and allocate costs more accurately, providing a clearer picture of the profitability of each room type.
Break-Even Analysis: We performed a break-even analysis to determine the minimum occupancy rate required to cover the fixed and variable costs associated with the expansion. This analysis indicated that the expansion project is likely to be profitable even with a moderate increase in occupancy.
Market Analysis: We analyzed the potential market demand for hotel rooms in Lonavala, considering factors such as tourist arrivals, competition, and seasonal trends. The analysis suggests that there is a strong demand for mid-range hotels in Lonavala, particularly during peak seasons.
Competitive Analysis: We assessed the competitive landscape in Lonavala, analyzing the pricing strategies, amenities, and marketing efforts of other hotels. This analysis revealed opportunities for Hotel Rhythm Lonavala to differentiate itself through its unique offerings and competitive pricing.
4. Recommendations
Based on our analysis, we recommend the following:
- Proceed with the expansion project: The expansion project is financially feasible and presents a significant opportunity for Hotel Rhythm Lonavala to grow its business and increase profitability.
- Develop a detailed financial plan: This plan should include a comprehensive budget, cash flow projections, and a sensitivity analysis to assess the impact of various factors on the project's profitability.
- Implement activity-based costing: This will allow for more accurate cost allocation and help in making informed pricing decisions.
- Develop a robust marketing strategy: This strategy should target the right market segments and emphasize the unique selling propositions of the expanded hotel.
- Monitor and evaluate performance: Regularly track key performance indicators such as occupancy rate, average daily rate, and profitability. Implement variance analysis to identify areas for improvement.
- Consider debt financing: To fund the expansion project, explore options for debt financing from banks or other financial institutions.
- Implement strong internal controls: This includes establishing clear accounting procedures and policies to ensure financial transparency and accountability.
5. Basis of Recommendations
Our recommendations are based on the following considerations:
- Core competencies and consistency with mission: The expansion project aligns with Hotel Rhythm Lonavala's core competencies and its mission to provide high-quality accommodation and exceptional customer service.
- External customers and internal clients: The expansion will cater to the growing demand for hotel rooms in Lonavala and provide opportunities for internal growth and development.
- Competitors: The expansion project will allow Hotel Rhythm Lonavala to remain competitive in the market and attract new customers.
- Attractiveness ' quantitative measures: The financial analysis indicates that the expansion project is likely to be profitable, with a positive net present value (NPV) and a reasonable return on investment (ROI).
6. Conclusion
The expansion project presents a significant opportunity for Hotel Rhythm Lonavala to grow its business and enhance its profitability. By carefully planning and implementing the recommended strategies, the hotel can successfully navigate the challenges and capitalize on the potential benefits of this expansion.
7. Discussion
Alternatives not selected:
- Option 1: No expansion: This option would have limited growth potential and could result in the hotel losing market share to competitors.
- Option 2: Smaller expansion: This option would require less capital investment but would also generate lower returns.
Risks and key assumptions:
- Economic downturn: A decline in tourism could negatively impact occupancy rates and profitability.
- Increased competition: New hotels entering the market could intensify competition and put pressure on pricing.
- Construction delays and cost overruns: These could impact the project timeline and budget.
Options Grid:
| Option | Advantages | Disadvantages |
|---|---|---|
| Expand | Growth potential, increased profitability, competitive advantage | Capital investment, risk of economic downturn, competition |
| No expansion | No capital investment, lower risk | Limited growth potential, potential loss of market share |
| Smaller expansion | Lower capital investment, lower risk | Lower returns, limited growth potential |
8. Next Steps
- Develop a detailed financial plan: This should be completed within the next 3 months.
- Secure financing: This should be completed within the next 6 months.
- Begin construction: This should be completed within the next 12 months.
- Implement marketing strategy: This should be launched 3 months before the opening of the new rooms.
- Monitor and evaluate performance: This should be done on a regular basis, with performance reviews conducted every quarter.
By following these steps, Hotel Rhythm Lonavala can successfully navigate the challenges and capitalize on the opportunities presented by the expansion project.
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Case Description
A commercial real estate expert contemplated the best use of his family-owned land parcel through hotel development. The venture- and capital-structures were put in place as a lender committed to the debt capital. After considering operations, financing and taxation cash flows, the project could have potentially met the equity holders' return expectations. But things did not go as expected, and the costs overshot to outlier levels.
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