Ashen Dissanayake Part B
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Week 04 - Case Study - HotelWhistler Part B
Ashen Aloka Samarasinghe Dissanayake (2317179)
University Canada West
ACCT 621
Prof. Karen Mae
February 14
th
, 2024
To: Managing Director ‘HotelWhistler’
From: Financial Consultant
Subject: Assessing and Optimizing Financial Performance
Issue 01: Potential cash flow conflicts in choosing accelerated depreciation method
. Analysis of Cost value with Accelerated and Straight-line method on providing recommendation on the best method to apply. The company has determined the fixed cost of the HVAC system based on some operating expenses, Therefore, rectification of the calculation will be evaluated to determine the accuracy of the estimate. HVAC System
$120,000
Installation Fee
$20,000
Staff Training $5000
Delivery Cost
$2000
Extended Warrarnty
$4000
Government Compliance fee
$500
Total Cost of the HVAC System
$161,500
I’m writing to provide a brief analysis and recommendation regarding selection of the depreciation method
for the HVAC system.
Here is the breakdown based on two methods looking at the first 3 years. Accelerated Method: Depreciated Amount $
NBV $
1st Year
21,641
139,859
2nd Year
18,741
99,476
3rd Year
13,330
86,146
Straight-line method:
Depreciated Amount $
NBV $
1st Year
22,725
138,775
2nd Year
22,725
116,050
3rd Year
22,725
99,325
The accelerated depreciation method, while potentially advantageous in certain situations, may not be the
most appropriate choice for HotelWhistler at the moment addressing the current financial scenario. As the
company is already experiencing loss in revenue comparable to increase in operating expenses and prepaid expenses, the accelerated method will be resulting in higher expenses particularly in the first few years. This may further exacerbate cash flow challenges and financial instability particularly in this reduced revenue period.
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Rationale for Selecting Straight-line method
In addressing current financial challenges, I recommend focussing on Straight-line depreciation for the HVAC system. This method allocates depreciation expense evenly over the asset’s useful life, providing more predictable and stable cash flow. Further straight-line method can help in mitigating immediate cash
flow burden and to better align with long-term financial objectives.
Issue 02 : Dilemma on determining the financing option
Analysis:
Pros and Cons: Debt Option: Pros
-
Offers immediate capital inject without diluting the ownership
-
Fixed interest expense will provide better financial planning -
Possible tax deductions
Cons -
Carries financial risk and cash flow challenges -
Debt is an obligation
Recommendation
Considering additional equity or debt financing, debt option will be more advisable for HotelWhisller’s Long-term financial health. Despite the increase in liabilities , the return on debt will be relatively higher than the equity option. Considering the loan option represents a $16,000 interest expense which is an obligation for the company
which needs to be paid out of revenue. This expense will add extra burden to current expenses which are already on the rise. ROI on Debt - Est.Net Revenue - Interest Expense
Net Profit - $340,400, Therefore, ROI on Debt will be 170.2%
Meanwhile ROI on equity investment, will be calculated based on estimated Revenue of 8% increase for 2024, $356,400
.
Estimated ROI Equity - Net Revenue / Initial Investment * 10%
So, Estimated ROI is 17.8%. Comparing two options, debt option still appears to be the preferred option.
Issue 3 : Encounter of Ethical issues related to Feedback System Implementation
Analysis: Implementation of the new feedback system incentivizing guests with discounts for positive feedbacks has raised ethical concerns and potential impact on profitability of HotelWistler. Here are the evaluated effects on their ethical image and profitability. -
Raising questions on hotel’s integrity and transparency
The practice of incentivizing guests in return for positive feedback may compromise the genuine review and ratings of the hotel. This might undermine the hotel's management’s reputation.
-
Short term boost vs. long term damage
Despite the initial boost of business due to positive ratings, reliance on authenticity of the hotel’s quality and service could damage long run reputation and customer trust which might affect profitability.
-
Offering discounts incur a cost without guaranteeing genuine feedback, impact on revenue and profitability. Conclusion
Considering the current financial situation, Hotelwhistler certainly do not need further damage to their clientele impact on their revenue and reputation. Therefore the company needs to address issues carefully by prioritizing the ethical business practices and maintaining integrity in the guest feedback system.
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