Tysons Corner Marriot Hotel Harvard Case Solution & Analysis

Why is the partnership losing money? What will the cash flows look like in 1992? What are your assumptions?

The partnership is losing money due to some factors, and these are given below.

  • The first factor for losing the money is the negative free cash flows or zero cash flows in some last years. The hotel is unable to have healthy cash inflows. The event can point a finger on the going concern assumption of the hotel.
  • The second reason is the distribution of an amount of $10 million loan at the rate of 12%. The cash flow position has started deficit since the second loan of $10 million taken that puts a pressure of cash outflow of $1.2 million every year that represents 27.6% of operating cash flows. If we exclude this amount, then the hotel is having net cash inflows for the years of operations except 1981.
  • The third reason is the decline in revenues, and the costs are increasing as the time passes by.

The hotel industry is facing a decline, therefore it is hardly impossible for the hotel to generate positive cash flows without an innovation and capital expenditure. The partners are with a proposal to have an innovative capital expenditure, but their funds raise policy not acceptable for positive cash inflows. If the hotel is going to raise extra debts, then the cash flow conditions will deteriorate.

Operating cash flows are positive, but the mortgages and Marriot fees make the total cash flow negative, fees are variable and dependent upon the revenue, but the mortgage loan interest payment is fixed and give a burden of above 80% of operating cash flows in 1988. With the current growth rate of sales and without loan the cash flow deficit is $190,000, and it can be worse with the loan interest payment of another loan.

It is assumed that the interest payment will continue for the next four years and this takes most of the cash flows and the royalty fees to Marriot will put the cash position in deficit for the future years.

The hotel is facing high competition, and the competition is going to increase due to the increase in the number of hotels in the near future. There is a construction undertaken of six hotels that are about to start with within three years from now.

What options does Green have? What should he do?

Green has many options to make its hotel successful, and the options are defined briefly below.

  • The first option for Green is to sell the existing hotel and go for new hotel construction at a total cost of $56 million from that he will raise a debt of $30 million and $26 million as equity financing (Appendix 2).
  • The second option with Green is to appoint five professional managers that will work on to control the cost and decrease it along with their steps will be to increase the revenue.
  • The third option he has to offer new amenities services in his hotel is the usual practice in competitive hotels.
  • It has the last option to raise funds from the external lender, but that lender requires a guarantee of any partner that makes his liability as unlimited for the lender in case of uncertainty of insolvency of the hotel.

The most suitable option for Green is to go for improvements and appoint professional managers to tackle the cash deficit situation. The issue for improvement purpose is to raise the finance for the improvement purpose.

Tysons Corner Marriot Hotel Case Solution

The new hotel will require heavy cash from debts and equity, therefore it is viable to go for improvement on current hotel rather than going for another hotel investment. The hotel industry is now going through a competition in Tyson. Hence, another hotel may not seem to be a profitable investment. The hotel room rent per day will be $140; the rate is higher than many other hotels in the area. Therefore, the investment does not seem to be worthwhile.

Green must go for extra equity from the current shareholder because the external lender will require an unlimited liability from any of the partners and no partner can agree to this condition by looking at the current market and hotel conditions.................

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