Delawana Inn Resort Canada Case Study

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Then, the factor of having superior product like the building itself is critical, the management need to maintain the good condition of the building. In this case, Delawana Inn want to maintain the rustic theme look for the resort thus it need to ensure that the interior design meet the theme. In addition to that, it can also provide variety of packages like fishing trip and good quality of food and beverages as the unique selling point of the superior product of Delawana Inn.

Next is the factor of superior location. The location of Delawana Inn in Georgian Bay makes it suitable to organise annual event to attract tourist like water-based sport. The suitable way is to use destination marketing (Baker & Cameron, 2008) It can also promote its location by advertising in the newspaper or radio. By conducting the critical success factor analysis, we can confirm that fulfilling customer preference is important and it change s over time as it is dynamic.

5.2 Financial Analysis – Capital Budgeting

Capital budgeting technique is being used to analyse between two alternatives either to rebuild or renovate the building. Relevant information for capital budgeting computation is given in the case. Tax rate is at 25%. Estimated cost of capital is at 10%. Capital allowance at 10%. Several assumptions have been made as basis for calculating the revenue such as number of weeks during peak, off-peak and break season. There are 10 weeks of summer, 10 weeks of winter and 30 weeks consist of spring and autumn. As stated in the case, level of occupancy during peak season is very close to full capacity. 95% is used as basis. Meanwhile, level of occupancy during off-peak seasons is between 60% to 70%. Therefore, 65% is used as basis of calculation.

If Peter Grise choose to rebuild the B3, $900,000 is the initial expenditure that Delawana Inn need to incur. Cost for rebuilding one room is higher which is $30,000. The building is expected to last for 30 years. Besides that, upkeep expenditure is lower which is $5,000 for every 10 years. This alternative is expected to generate net present value (NPV) of $8,646,826.53, internal rate of return (IRR) of 125.71% and annualized net present value (ANPV) of $1,108,105.96. The cash flow analysis can be seen in Appendix 2.2

Whereas if Peter Grise decided just to renovate the building the cost would be $300,000. Cost for renovating one room is $10,000. Although initial expenditure is low, the building is expected to last only for 15 years. In addition, upkeep expenditure is slightly high which is $6,000 every 10 years. The NPV for this alternative would be $6,644,701.46, the IRR is 318.36% and the ANPV is $939,399.71. The cash flow analysis can be seen in Appendix 2.1

Since both project have different timeline, the project shall be evaluated based on the ANPV as it presents a more accurate basis (Bora,2015). Rebuild alternative has higher ANPV, however, renovate alternative has higher IRR. Details of the calculation is shown in Appendix 2.

6.0 ALTERNATIVES

As stated in the case, Peter Grise only has two alternatives either to totally rebuild the B3 building or to renovate it. By using information given in the case, capital budgeting analysis has been computed. Kindly refer Appendix 2 for the details.

7.0 DECISION CRITERIA

Decision criteria have been listed out and ranked based on level of priority.

7.1 Increase Customer’s Satisfaction

Customer satisfaction is crucial in hospitality industry such as hotel and resort. It could be achieved by fulfilling the customer’s preference. Satisfied customer could be an effective and inexpensive marketing agent for the resort for promoting its’ facilities and services (Chon & Whelian, 1993). Besides that, there is high probability for the satisfied customer to visit the resort again in the future. Therefore, alternative that could maximize customer satisfaction should be opted by Peter Grise.

7.2 Increase Sale

Sale is directly related with level of occupancy. High level of occupancy could be achieved with convenient and attractive room and facilities. Size, safety and design of the room are factors that will influence customer satisfaction.

7.3 Higher Return on Investment

Initial expenditure is relatively high in hotel and resort industry. Huge investment has been made in capital expenditures such as cost for developing building and facilities. Seasonal maintenance is also required to ensure the building and facilities are in good condition. Basically, return on investment will be reinvested for maintenance and expansion purposes. Therefore, alternative that maximizes return on investment should be emphasized.

7.3 Lower Cost.

Alternative with lower construction cost is preferable since the resort could save its’ capital for other purposes.

8.0 EVALUATING THE ALTERNATIVES

Both quantitative and qualitative measurement have been used for evaluating the alternatives. Capital budgeting analysis has been computed as quantitative measurement to identify which alternative provide higher return. At the same time, advantages and disadvantages of each alternative are being identified as qualitative measurement.

8.1 Rebuilding

Cost of rebuilding is higher compared to cost of renovating. Each room will need $30,000 for rebuilding purpose that make the total capital expenditures is $900,000 for 30 rooms. Annualized net present value (ANPV) has been used when comparing alternatives with different period of life. Capital budgeting analysis is computed to determine ANPV and internal rate of return (IRR) of the alternative. ANPV and IRR for the first alternative is $1,018,105.96 and 125.71% respectively. ANPV for rebuilding is slightly higher compared with ANPV when the building being renovated. High ANPV reflects that the resort will have more capital to be reinvested in the business. However, its’ IRR is lower compared with second alternative’s IRR. The building will last for 30 years if being rebuilt, longer than if the building being renovated.

Totally rebuild the building provides advantages to Delawana Inn. New building with more appealing design and facilities could be developed. Therefore, it will attract more customers to visit and revisit the resort. Besides that, size of the room could be enlarged to ensure the