Sakura ShuDecember 1st, 2013

Financial AnalysisSemester Project

Fairmont Hotel Expansion Plans

Introduction and Analysis

As the general manager of Fairmont Hotel, it is my responsibility to analyze the current

financial condition of the hotel and decide whether a renovation is going to financially benefit

the hotel operation. Given the 2004 income statement and projected incomes and expenses, I

have generated several income statements and analysis which will assist me in making decision

for the current expansion plan.

In the year of 2004, the net income is $1,130,000.00 (please see attached financial

statements). If the hotel goes through the expansion, the 2005 net income is $3,278,261.32. If

we are only considering the net income for 2005, it may seem like it is a wise decision to follow

through with the expansion plan. In order to see a comparison, I have created a comparative

analysis for 2004 and 2005 (financial statements, page 3).

As shown in the comparative analysis, there will potentially be a 16.9% increase in

revenue, 3% in undistributed operating expenses, and 8.5% in fixed expenses. Room revenue

drastically increases due to the prediction of increase in occupancy in the VIP floor and the

increase in room rate. However, take in future expenses into consideration; expansion may not

be a good idea at this point of time.

We are assuming the operating revenues will stay constant in the next few years. We

are given the facts that marketing, mortgage, and interests expenses will increase on an annual

basis. Therefore we must also take consideration of the increase of undistributed operating and

fixed expenses for the next three years. I have made projections for the years of 2006, 2007,

Sakura ShuDecember 1st, 2013

Financial AnalysisSemester Project

and 2008. If operating revenue stays the same and expenses continue to increase, the overall

net income will also decrease annually. In 2006, the net income is $1,803,902.39. The next two

years the net income will drop to $1,147,107.99 and $491,313.99.

Conclusion:

Assuming that all operating revenues are the same, and there will be constant increase

in marketing, mortgage, and interest expenses, the net income after taxes will continue to

decrease, and within three years will be lower than the year the year of 2004. In conclusion, the

net income of 2005 after expansion may be pleasing to stakeholders. However, if expenses

continue to decrease and revenue stays the same, it is not a wise decision to conduct an

expansion within the hotel.