Project: Renovating the Hungerford Hotel
Instructions:
The owners of the Hungerford Hotel are considering whether they should hold the hotel or renovate it, as well as when they should consider selling the hotel. Answer the following questions based on two scenarios for the Hungerford Hotel that are shown on the last page in this document. The first scenario is the base case, which Professor deRoos analyzed in the video on the previous page “Case Study: The Hungerford Hotel.” The second scenario is the renovation case, which assumes that the renovation has been completed. You can assume that the hurdle rate is 14%.
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SHA613: Developing an Asset Management Strategy
School of Hotel Administration, Cornell University
Project: Renovating the Hungerford Hotel
Instructions:
The owners of the Hungerford Hotel are considering whether they should hold the hotel or renovate it, as well as when they should consider selling the hotel. Answer the following questions based on two scenarios for the Hungerford Hotel that are shown on the last page in this document. The first scenario is the base case, which Professor deRoos analyzed in the video on the previous page “Case Study: The Hungerford Hotel.” The second scenario is the renovation case, which assumes that the renovation has been completed. You can assume that the hurdle rate is 14%.
To submit this assignment, please refer to the instructions in the course.
1. In what year or years does the holding period IRR for the renovation exceed the holding period IRR for the base case? Provide evidence for your answer.
2. The renovation case shows a significant increase in both occupancy and average daily rate (ADR) from the base case. For example, in year 4, the renovation case has a 72.5% occupancy rate and an ADR of $199.39, while the base case has an occupancy rate of 71.0% and an ADR of $190.02. Provide a rationale for how the renovation could result in increases in both the occupancy and the ADR given that these two revenue metrics are frequently in tension with each other.
3. Consider the base case and the renovation case separately. For each case, when would you advise a sale, assuming that the goal was to sell the hotel as long as the marginal rate of return (MRR) is above the hurdle rate of 14%? Provide a brief explanation of your answer.
4. For the base case scenario, given that the holding period IRR is maximized in year 1, does it makes sense to sell, then? Assume the hurdle rate is 14%. Provide a brief explanation of your answer.
5. Assume the Hungerford is renovated. When might it make sense to think about selling the hotel? Provide a brief explanation of your answer.
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