Question

Dorothy Goldman's Star Inn has ahcieved moderate success for the past 5 yeatd, as it
had an ADR in five of $60 ADR and paid occupancy of 75%. Yet she wonders if her rooms-
only lodging facility with 100 rooms might do even better if it was part of a franchised
system. Willie Hernandez from the Quintinilla Loding Chain (QLC) suggests that her hotel
would benefit from a francisee with QLC.
	Through careful study, Dorothy has gathered the following informatiom:
1. The initial fee with QLC of $50,000 will be paid at the signing of the franchise agreement.
For tax purposes, the intial fee would be amoritized over a 5-year period at $10,000 a year.
2. The paid occupancy percentage is expected to increase by 2 percentage points, and ADR
is expected to increase $2 per room due to this association.
3. Advertising fees to be paid to QLC would be 2% of total gross room sales, while the
royalty fee would be 3% of total gross room sales.
4. The reservation fee is $5 per room per month for all 100 rooms.
5. Assume the variable costs other than those mentioned above are 50% of gross room
sales, and that fixed costs would be unchanged.
6. Assume and average tax rate of 30% for the Star Inn.
7. Assume the Star's Inn cost of capital is 12%
REQUIRED:
Based on the above information, should Dorothy Goldman sign on with QLC?

Answer 1

Note: Since nothing has been mentioned, 360 days in a year is considered for the calculation purposes

Without Franchise:

With Franchise:

Since NPV without franchise > NPV with franchise hence Dorothy Goldman should not sign on with QLC.