1.

Drake Hotels PLC owns 20 budget hotels in the UK. Each one is located in a different city. The industry is very competitive and Drake’s managers all have an objective to help the business to be as efficient as possible.

Drake Hotels PLC’s operating profit for the financial year 2019–20 was £18 million. Last month the company appointed a new Chief Executive, Mary Myers, to increase the profitability of the business. Mary was previously the Marketing Manager of an upmarket hotel chain.

Mary is already considering an investment proposal for a luxury hotel in Oxford. This hotel would target overseas visitors who might want to visit the city. Drake Hotels has found a suitable building but needs to invest to develop it.

Appendix A Investment appraisal results for the proposed investment into a new hotel in Oxford (based on net inflows for first eight years).

Average rate of return 12% per year
Net Present Value £25 million

Source: Chief Executive

Appendix B Sensitivity analysis for the new Oxford hotel investment proposal

Two possible changes in the economy that might affect the investment appraisal results in Appendix A	Estimated probability of this change happening
The value of the pound against other currencies is 10% higher than originally forecasted.	20%
The average GDP growth in overseas countries is 1.5% higher than originally forecasted.	30%

Source: Chief Executive

Appendix C Selected financial data for Drake Hotels PLC

	£ million as at 1 May 2020
Current assets	15
Current liabilities	18
Total equity	170
Non-current liabilities	280

Appendix D Forecasted data for Drake Hotels PLC’s new Oxford hotel investment proposal

Initial investment required £20 million
Estimated income elasticity of demand +2
Percentage of customers visiting from overseas 70%
Estimated cost of borrowing for this investment 8% per annum

Appendix E Room bookings by month and day of the week in Drake Hotels PLC’s budget hotels 2019