The Star Restaurant Company owns and operates Chinese restaurants throughout the northwestern United States. Paris Brown, vice president of development, has been analyzing a new metropolitan market for expansion opportunities. The company’s best option would be to acquire a distressed property at a low price and turn it into a money-making venture. Ms. Brown is contemplating taking over a restaurant that recently failed and is currently closed. The restaurant is located in the parking lot of a large regional shopping mall. The mall owner is anxious to reopen the restaurant, as in its current state it is an eyesore and a deterrent to attracting retail customers. Ms. Brown asks the previous owner for historical operating results for the failed restaurant, and she is provided with the following information: Based on Paris’s market analysis, tour of the competition, inspection of the subject property, and interviews with the prior owner, she concludes a Star Restaurant would work in the subject space, but it would require approximately $200,000 of renovation and conversion cost in addition to the land purchase price of $2,000,000. By Year 5, the restaurant could generate $2.5 million in annual food revenue and $1.5 million in annual beverage revenue. Ms. Brown estimates the following cash flows for the first five years of operations, with cash flows leveling off in Year 5. 1. Calculate the IRR and NPV of this project utilizing a 12% discount rate and a 15% cap rate. Ms. Brown was able to secure a loan for $1,540,000, and an equity investor agreed to invest the remaining $660,000 in exchange for 20% ownership in the project. 2. What is the loan-to-value ratio for this project? 3. What would the investor’s ROI be for this 5-year project if the restaurant achieved its budgeted operating results for the year? 4. If the investor has a hurdle rate of 15%, does this project meet or exceed the investor’s requirements?

          

 

Nicole Sharp, director of acquisitions for Sahara Hotels Corp., has discovered a promising location for a future hotel. The subject property is located in a densely populated urban setting and borders the business district in Shepard City. Ms. Sharp is in the process of developing an investment package for potential equity investors and has put together the following fact outline: â–  The location of the proposed hotel is excellent, as it is located in one of the fastest-growing market areas in Shepard. Businesses have been readily moving to Shepard because of favorable tax incentives. Along with increased business development, local hotels have experienced an increase in ADR and revenue per available room. â–  The acquisition price of the land will be $3.5 million, with an additional $15 million needed for construction costs for the proposed 197-room property. In total, the project will cost $18.6 million. â–  The city is currently in the process of building a major freeway in front of the proposed build site, which will increase land values and traffic. â–  The hotel competition in the immediate area consists of two major branded hotels and one independently operated property. Competitor A is a budget hotel, Competitor B is a midmarket property without food and beverage facilities, and Competitor C is an upscale independent property with food and beverage facilities. Ms. Sharp is proposing to build a 197-room upscale full-service property to meet the underserved business travelers currently visiting the area. The following is a pro forma for the first six years of operation. Ms. Sharp has projected six years because she has set a timeline to sell the property in Year 6 at an 11% cap rate. 1. Is any information missing that should go into an equity investment package? If so, list the information missing. 2. Calculate the return on investment in Year 1 for an equity investor who provides 45% of the total project cost. 3. Calculate the internal rate of return for this project with a sale in Year 6. (Utilize the cap rate method for sale price in Year 6.) 4. Would you invest in this project? Why or why not?