Contents of the Document to Be Submitted

CONTENTS OF THE DOCUMENT TO BE SUBMITTED:

SOLUTION TO THE CASE. It is very important that they present the following points in a Excel document:

A) Indicate or specify each element that is detailed in the case, and that it is necessary to make the decision to SELL the land or BUILD the hotel.

B) Create the INCOME STATEMENT by the Sale of the land and the projection of construction of the hotel.

C) Develop the EVALUATION OF INVESTMENT PROJECTS (NET PRESENT VALUE, PAYBACK PERIOD, DISCOUNTED PAYBACK PERIOD, PROFITABILITY RATE, and INTERNAL RATE OF RETURN) for the construction of the Hotel.

D) Choose what decision they would make.

E) Issue a conclusion egarding all the work that was developed when analyzing a case of this nature.

Investment hotel in Huatulco

A warm night in May 2000, Andres Marquez, was in his office located on the sixth floor of a building located in the Centre of the city of Monterrey. The course of the day had been difficult, since, both in the morning and in the evening, he had some meetings with the council of the company for which he worked and he was requested for his prompt professional opinion, over whether to be or not an investment for more than 70 million pesos for the development of a hotel at a tourist area in expansion.

Andrew was a professional with knowledge and experience in finance, and had been hired by tourist developments, S.A. de C.V. (in spanish: DETURSA), as Director of projects, to analyze the feasibility of carrying out some investment. This company, formed only a year earlier, had been formed by the paramount of some interested Mexican investors undertake a hotel project in the tourism development of bays of Huatulco, Oax., rather than by its natural attractions and options of future development seemed to offer a good business opportunity. However, due to the little experience that its directors had in tourism, and consequently to the difficulty of predicting future results, the decision had been postponed in waiting for greater information that would provide them certainty about the risk and profitability associated with your investment. The work of Andres, was to elaborate the study that would allow them to see the real possibilities of success of this investment, as well as identify and convince the funding sources that would provide the financial resources complementary to those of the shareholders.

During the previous month, foreign investors had visited the development of Bahías de Huatulco, turning specifically to the land where it was projected to make such investment. After the foreign investors made an offer to shareholders of DETURSA for their acquisition, some counselors of the company showed some interest in the sale of the land, while others were betting to the success of the hotel project. This difference of opinions had to be settled soon; but it required have all the information required to reach a decision. For this reason, had been imposed to Andres a deadline which expired in three weeks, so submit a document to allow to make a final and successful decision.

Is worth mentioning that a sense of urgency, prevailed since in addition to the buyer had put deadline on its offer, it also showed some nervousness among investors by the uncertainty about the future state of the economy: the federal elections were coming and according to news, , it was to be expected the arrival to power of a political party different from that currently governed.

Andres had been gathering diverse information, which could be useful in their work.

Industry landscape

According to the forecasts of the world Organization of tourism, for the period 1995-2020, it was awaited at the international level, annual average rates of growth of 4.3% in number of tourists, as well as the 6.7% on costs generated by these. In the case particular of Mexico, it was predicted for the next 20 years to be the 8th place in terms of tourism arrivals (48.9 million) and participation in the market (3.7%), with an annual average rate of growth of 3.6%, which contrasted with a growth national industry from 1992 to 1997 of 1.4%

The latest available data exposed the preference of tourists by the destinations of beach. It is important to mention that, of the reservations systems used by the tourists, the ones that reflected increased demand were: own (of the hotel) with 29%, the use of travel agency with 25% and tour operator with 21%. Which was an indicator of the importance of having a sales force itself, with contracts with companies operators, as well as with travel agencies abroad, in order to strengthen a sales strategy.

OCCUPATION / 1995 / 1996 / 1997 / 1998 / I sem. 1999
Cancun / 80.4% / 78.0% / 82.7% / 81.9% / 80.5%
Acapulco / 54.2% / 55.9% / 54.5% / 51.3% / 59.6%
Vallarta / 62.3% / 67.3% / 69.7% / 69.1% / 72.9%
Ixtapa / 48.4% / 53.4% / 53.0% / 59.8% / 60.0%
Los Cabos / not available / 73.6% / 66.9% / 64.6% / 62.8%
Bahias de Huatulco * / 50.8% / 51.9% / 53.4% / 51.6% / 54.6% (until
August)

Table 1. The main occupation tourist destinations of beach * at luxury hotels, 4 and 5 star
* It includes all categories of hotels
Source: Office Castillo Miranda and FONATUR.

With regard to Huatulco, despite being entirely planned development by

FONATUR (national tourism development fund), had seen growth slow and their levels of occupancy in the hotels in the area had not exceeded 55%. One of the most important reasons was that it had detected according to tourists and visitors, the access road to the development of Bahías de Huatulco was deficient; the travel in the city of Oaxaca to the area was estimated in six hours, which had become little by little in a not very accessible destination mainly for the sector of middle-class making greater use of the ground transportation. In this way, the air transportation had become the most viable option for the arrival to this development, this being mostly acquired by the socio-economic higher-income poppulation (upper class) that demanded more services of a high standard hotel.

HOTELS / 1993 / 1994 / 1995 / 1996 / 1997
Hotel Gala Huatulco (formerly Royal Maeva) / 67.8% / 65.8% / 68.5% / 69.8% / 69.9%
Hotel Sheraton Huatulco Resort / 55.2% / 63.4% / 58.1% / 62.1% / 55.7%
Hotel Club Meditarranee / 41.7% / 58.4% / 47.9% / 49.6% / 46.3%
Caribbean Village Huatulco (Crown Pacific) / 46.2% / 60.9% / 57.9% / 63.2% / 65.3%
Hotel Omni Zaashila Resort at Huatulco / 27.6% / 37.0% / 37.9% / 43.0% / 41.0%
Hotel Quinta Real Huatulco / 38.5%
Hotel Castillo Huatulco / 41.0% / 41.9% / 42.9% / 61.5% / 68.3%
Hotel Meiga Binniguenda (Grand Meigas) / 28.4% / 30.2% / 26.2% / 40.4% / 51.2%
% AVERAGE OCCUPANCY / 48.9% / 57.0% / 52.3% / 57.3% / 55.4%

Table 2. Percentages of average occupation of hotels located in bahias de Huatulco

The information collected regarding the rates in the area were variables and density

average age of two guests per room.

HOTELS / 1993 / 1994 / 1995 / 1996 / 1997
Hotel Gala Huatulco (formerly Royal Maeva) / 269.4 / 292.4 / 380.8 / 513.6 / 609.3
Caribbean Village Huatulco (Crown Pacific) / N.A. / 334.2 / 300.9 / 351.6 / 422.1
Hotel Castillo Huatulco / N.A. / N.A. / 243.1 / 312.5 / 358.2
Hotel Meiga Binniguenda (Grand Meigas) / 183.4 / 174.7 / 172.8 / 235.9 / 379.6
Other Beach (only lodging) / N.A. / 237.0 / 376.1 / 641.8 / 667.4

Opposed to this, coverings in the hope that the construction of the

Freeway Oaxaca-Huatulco (which had been announced by the State Government months earlier), would homogenize the hotel demand throughout the year, and hence, raise it.

In addition, shareholders had been reinforcing the project through two made: first, the negotiation with Signature Vacation - Canadian tour operator - for the signature of a contract that would bring tourists to the hotel through charter airplanes; and second, the hiring of a hotel operator's with prestige, which could boost one strategy that would attract clients and would start with occupations of 62%, to gradually up to 76% in a period of 10 years.

The project

Since its foundation and to date, DETURSA had invested the amount of $ 425,000 mexican pesos in the elaboration of studies which enabled him to identify various possible business in the tourist industry, as well as other $ 350,000 MXN for negotiations and visits to sites where there were possibilities of investing. This resulted in the acquisition of land with total area of 12,000 m2, located in the development of the bays of Huatulco (Bahías de Huatulco in spanish) in the State of Oaxaca, at a price of $ 7'620, 000 MXN. Similarly, are asked the price of the cost of its construction to a firm of civil engineers, which in together with the company determined the following:

CONCEPT / TOTAL
Construction of the hotel's 150 rooms category
- preliminaries and platforms / 2,920
-Foundation, structure, slabs and walls / 13,290
-Structure of stairs
-Structure of roofs and ceilings, rooms and services / 100
910
-Masonry, finished exteriors and interiors, baths and cover / 15,080
-Outdoor areas, swimming pools and retaining walls / 3,530
-Hydraulic-sanitary facilities / 4,200
-Installation of LP gas. / 960
-Electrical and special installations. / 6,970
-Fire system / 1,490
-Air conditioning (HVAC) system / 5,320
-Coordination, design and engineering services / 2,510
-Executive project / 1,680
-Team division of rooms, food and drinks, and entertainment and sports / 11,220
-Furniture and office equipment / 1,080
-Tool maintenance and signalling of areas / 540
-Boutique, computer equipment, switch and signal of T.V. / 1,950
-Vehicles / 900
TOTAL: / 74,650

Table 4. Concepts of investment in fixed and intangible assets
(Amount in thousands of Mexican pesos)

Construction company planned to build the work in 22 months, estimating that 60% of the construction would be done during the first year, and the remaining 40% (as well as the complete investment team) in the second year.

Location / Santa Maria Huatulco, Oax.
Number of units / 150 rooms standard with balcony (35 m2 each)
Facilities: / Lobby bar, a restaurant, a café, a lounge of multiple-use area commercial, two swimming pools, gym, parking, service areas and Office
Area of land / Total: 12 000 m2
Beach front: 85 m.
Area built of
Agreement to project
architectural / Breakfast area: 5,400 m2 (rooms and roperias)
Public areas: 2,255 m2 (Lobby, shopping area, restaurants and )
main square)
Outdoor areas: 1,824 m2 (parking, swimming pools, miniclub, )
gym and spa)
Service areas: 1634 m2 (administrative offices, warehouses, kitchens...)

Table 5. Features of the hotel building

The hotel operation

The source of income would be constituted by the hotel operation (without considering time shared). The company planned to start activities after the stage of construction of the hotel, taking into account that the normal operation out of an average of 355 days per year (due to annual maintenance per unit).

Financial structure
Assets / Liabilities
Current assets / Current liabilities
Cash and accounts receivable / $382 / C. P banks.
Inventories / Suppliers
Others circulating / Other
$382
Fixed
Machinery and equipment
Land / $7,620 / Capital
Social capital - / $8,777
Deferred / $775 / Retained earnings / $0
Total assets / $8,777 / More capital liabilities / $8,777

Table 6. Balance sheet at December 1999.
(Amounts in thousands of pesos)

In mid-2000, the numbers of the company remained virtually unchanged, and there was no statement of income, since the company was recently initiated and still had operations.

Since the project began recently and that there were no historical developments figures located in Huatulco, Andres sought information from primary sources, concluding that for the case designed hotel, would be variable costs equivalent to 12.8% of sales (without include depreciation), and fixed costs of $18 million pesos annually, to an occupation between 60 and 69%, as well as $21 million in occupations of the 70 to 80%. In addition to the foregoing, the following information of similar hotels expected:

Miramar / Operating company / Other Beach
REAL
1998 / REAL
1999 / REAL
1998 / REAL
11/1999 / (Miranda Castle,
1998)
Cost of sales / 57.13% / 57.06% / 12.2% / 22.4% / 37.09%
Administrative expenses / 29.35% / 29.91% / 66.2% / 48.0% / 35.85%
Operating income / 13.52% / 13.03% / 21.6% / 29.6% / 27.06%

table 7. Comparative of costs and expenses of hotels

According to the characteristics that would present the hotel - in terms of size, market target and seasonality in the demand for foreign travel, as well as the concept (all included)-, it was considered that it would be very similar characteristics to the hotel Miramar.

In addition, there could be other restaurants, space and other rental income equivalent to 6% of income of hospitality.

The estimated investment required to maintain working capital was MN $1 ' 020, 000 for the first year of operation and MN$ 1'525, 000 for the second year.