Forest Castle Hotel

PM008           Case Study        Summer  2014

Forest  Castle    Page Number  1
PM008      Case Study        Summer 2014 (April Cohort)
Forest Castle Hotel
Forest Castle Hotel is a 4/5 star hotel based in the Highlands of Scotland.  It is on a major trunk road (A9) and is
accessible by road and mainline rail.  There are excellent connections by public transport from Edinburgh,
Glasgow and Inverness airports.   All three airports are equidistant from the hotel and the railway line carries
trains to London and other parts of the UK.
The hotel has had a long history.  It was built as a hotel in 1901 and it boasts large gardens and has many
facilities in its grounds, including a golf course, tennis courts and long nature trails.  There are 150 rooms varying
from large suites, to family rooms, feature rooms, double and twin rooms and single rooms.  The Hotel can
accommodate 400 guests in total, but the effective max imum number is 300  (average two per room) . Children
and other guests sharing a main room or suite are generally free, but pay for meals as taken. The hotel also
boasts both an outdoor and indoor swimming pool with a therapeutic bath and sauna, a gym and a  spa treatment
facility.  The restaurant serves haute cuisine (high quality food), and seats 100 people for a single sitting. The
average price of dinners is £30 per person.  Around 20% of residents take dinner in the hotel on inclusive terms,
and there is  a steady passing trade. The business of the restaurant generally tracks the occupancy rates. The
average price for functions is also £30 per head.
Over its long history, the hotel has served as a military hospital, a school and as a hotel.  The effect of the
various changes in use has been that the maintenance of the building (which is stone built in the main) has often
been neglected because of the large costs involved.  The history of the hotel has featured intermittent restoration
succeeded by years of d ecay.
The current owners of the hotel are based in Ireland and they purchased it some six  years ago from a large hotel
group. They have invested substantial amounts in bringing the premises up to a high standard.  They are now
considering investing a furt her £5,000,000 (five million pounds) in a functions suite to seat 300 plus, which will be
an addition to the existing 150 seating capacity room. If they make this investment they would hope to expand
the number of conferences held in the Forest Castle and  to hold larger events at regular intervals.  The owners
are confident that they will be able to double the gross income from functions by making this addition, based on
the  2 012/13  level of activity.
The peak times for bookings are the Spring and Summer quarters when rack room rates (double including
breakfast) can rise to £200 per night. In the Autumn and Winter quarters they offer packages at £150 per night
per room including breakfast and dinner.  (Room only rates are £20 cheaper in both seasons.)  The av erage
occupancy rates for the hotel, based on a 300 guest maximum and on a seven day week, is generally as
follows: –    { In order to provide clarification, the seasons are Winter (January to March), Spring (April to June), Summer (July
to September) and Autumn (October to December )}.
Season   Occupancy  Average
Number of
Rooms Let
No of
Room
Nights
Income from
Rooms (appx)
£’s
Income from
Functions
£’s
Restaurant
occupancy (exc.
Inclusive terms)
100 guests = 100%
Income from
Restaurant

£’s
Winter  50%   75   6,750  809,500   45,000   10%   29,000
Spring  65%   98   8,775  3,186,500   75,000   25%   72,000
Summer  90%   135  12,150   2,126,500   55,000   50%   137,000
Autumn   55%   83   7,425  877,500   75,000   40%   112,000
Maximum  100%  150  13,500   2,700,000
35,100   5,000,000   250,000     350,000

PM008           Case Study        Summer  2014

Forest  Castle    Page Number  2

There has been at least one function,  –  dinner or wedding etc., with around 120  – 150 guests each week, and
sometimes two each week, in the Spring and Autumn seasons. Each season has 13 weeks. Larger functions
with around 250 – 300 guests could nor mally be expected to be held throughout the year, probably at the rate of 4
per month.
The Income from the various activities over the last few years has been as follows: –
20 0 9   20 1 0   20 1 1   20 1 2   2013
£m  £m  £m  £m  £m
Overnight
guests
3.50 m  4. 0 0m  4. 50 m  4.75 m  5 .00 m
Functions   0.40   0.45   0.50   0. 50   0. 50
Restaurant Bar
etc
0.40   0. 35   0. 30   0. 35   0. 35

Total Income   4. 30 m  4. 8 0m  5. 3 0 m  5.60m  5 .85m

Costs are largely fixed, although there are variable costs with regard to the seasonal differences and the  restaurant &
housekeeping.
The  variable costs, as a percentage of relevant turnover are:-
Food and drink : –    average around 50% of restaurant turnover, 30% of function turnover  and 10% of room turnover
Seasonal staffing:-  average around 20% of non Room income
Seasonal staffing re Rooms :-  average around 20% of room income in quarters where occupancy is over 60%
Other variable costs include:
Laundry costs –  15% of room income and 10% of restaurant and function income

Fixe d Costs , which have increased at an average of 5% per annum, over the last few years can be summarised
as:-
Staffing: –    50 permanent staff at an average annual cost of £30 ,000  each
Heat & Light: –    Current annual cost  is £150,000
Maintenance and replacement: –  Currently £400,000 per annum
Communications:-     Currently £100,000
Marketing: –  currently 2.5% of turnover
Other Costs (excluding interest, tax) are usually about £250,000 per annum
Taxation of 18% of profits after loan interest of 5% on the outstanding loan of  £5,625,000 is payable. The loan is
repayable by annual instalments of £375,000.
A  Proforma Balance Sheet as at 31/12/2013 is attached, together with proforma Statements of Income
and Expenditure for the last five years.
PM008           Case Study        Summer  2014

Forest  Castle    Page Number  3
However, there is opposi tion to the investment from some of the management, who believe that in the current
state of business and the current economic recession, it would be  unwise to make this investment, and also from
those who think the money would be better spent on a champio nship golf course.
You are required to prepare a  report  discussing the merits of the proposed investment  and any
alternatives , especially bearing in mind the effect of any  slowdown in trade, and make a recommendation to
the owners.
You should consider the following matters: –
The investment will be made in Euros, thus exposing the owners to a risk in the exchange rate changing and
the hotel in repaying the loan, over twenty years at the same interest rate as existing loans.
Although a substantial sum has been spent in renovating the premises, there is a suggestion that the hotel
should upgrade the golf course to championship level. This would generate more high value residents and
possibly more day visitors should a major golf event be played there.  Limited resources would not permit
both the functions suite and the golf course to be developed.    The golf course, if redeveloped at a cost
of £5,000,000, would be able to attract green fees (players) of the order of £100 per player per round (4
players in each game  per round ). Du ring the Spring, Summer and Autumn seasons, it is estimated that in
excess of 250 games could be played each week. It is not yet clear what additional costs may be involved,
but it is likely that additional staff to maintain the golf course and also additi onal administrative staff would be
needed, as well as equipment and consumables required for maintaining the golf course. This cost will
increase in future years.  Of course, the golfers would increase the income in the restaurant and possibly
increase the  room occupancy in the busy periods.  –  perhaps allowing a rate increase.
In your analysis you should consider the future income trends and the related costs and cash flows.
You should use suitable capital investment analysis techniques and Foreign Exchange management
techniques, as well as demonstrating a sound underlying understanding of the various economic factors and
their influences in the current economic climate.
Your analysis and recommendations should include any estimates or assumptions that you m ay use, clearly
stated. Any academic references or data sources should be contextually referenced.

Mmlovatju l y2014

PM008           Case Study        Summer  2014

Forest  Castle    Page Number  4

Appendices
Forest Castle Hotel
Proforma  –  Statements of
Income

200 9   2010   2011   201 2   201 3

£  £  £  £  £
Income

Rooms etc   3,500,000  4,000,000  4,500,000  4,750,000  5,000,000

Functions  400,000   450,000   500,000   500,000   500,000

Restaurant etc  400,000   350,000   300,000   350,000   350,000

Total  4,300,000  4,800,000  5,300,000  5,600,000  5,850,000

Variable Costs

Food & Drink   670,000   710,000   750,000   800,000   825,000

Staffing  160,000   160,000   160,000   170,000   170,000

Staffing(Rooms)  435,960   498,240   560,520   591,660   622,800

Laundry   605,000   680,000   755,000   797,500   835,000

3,870,960  2,048,240  2,225,520  2,359,160  2,452,800

Gross Profit Margin  2,429,040  2,751,760  3,074,480  3,240,840  3,397,200

Direct Costs

Staffing  3,234,054  3,295,756  3,360,544  3,428,571  3,500,000

Heat & Light  123,405   129,576   136,054   142,857   150,000

Maintenance  329,081   345,535   362,812   380,952   400,000

Communications  82,270  86,384  90,703  95,238  100,000

Marketing  107,500   120,000   132,500   140,000   146,250

Other costs  250,000   250,000   250,000   250,000   250,000

Costs

2,126,310  2,227,251  2,332,613  2,437,619  2,546,250

Profit pre tax and interest   302,730   524,509   741,867   803,221   850,950

7.0%  10.9%   14.0%   14.3%   14.5%
Interest   5% *7500000   375,000   356,250   337,500   318,750   300,000
PBIT

– 72,270  168,259   404,367   484,471   550,950
Taxation   18 percent   – 14,000  30,000  72,000  87,000  99,000

Dividends  1%  50,000  50,000  50,000  50,000  50,000

Retained Earnings  – 108,270   88,259  282,367   347,471   401,950   3,011,776
Loan Repayments  375,000   375,000   375,000   375,000   375,000   3,875,000
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Forest  Castle    Page Number  5

ProForma Balance Sheet   as at 2013

Fixed Assets  £  £

Property   17,000,000

Fittings etc   4,500,000

21,500,000

Current Assets

Inventories   315,000

Debtors  120,000

Cash at Bank   100,000

535,000

Current Liabilities

Trade Creditors   200,000

Accruals   50,000

Dividends due  50,000

Taxation   99,000

Bank Overdraft

399,000

Net Current Assets   136,000

Long term Loans  5,625,000

(5% per annum  20 years)   – 5,625,000

Net Assets

16,011,000

Represented by:-

Share Capital  5,000,000

Revaluation reserve   10,000,000

Retained Earnings  3,011,000

16,011,000

.)