FINANCE & DISCOUNTING 1

BUS 101 CASE #5 – WHAT TO INVEST?

This had been a long week. I had started the week excited and full of energy being
assigned my first major project since joining the company. But now, I was way over my head
and in need of help, desperately. It was supposed to be a simple investment decision and I
was just to observe and understand the process, so I had thought. I was gravely mistaken.
Let me explain what happened.

It was three days ago and I was running late for my first meeting at ACME Asset
Management. I was so excited I had trouble sleeping the night before. Putting the irony
aside, I was already 10 minutes late when I barged into the meeting. Seeing I was late, my
new boss asked, “So what do you think about our current project? Which of these
investments do you think we should choose?” I stood there in shock. I wanted to answer his
question and impress him with my business savvy, but I had no idea about which was the
best choice.

The case was simple; we were supposed to find a suitable and a profitable
investment for a plot near the financial district. After some initial research, the company had
reduced it down to three options: a boutique hotel, an office tower or a shopping mall. All of
the projects had positive and negative aspects. For example, a boutique hotel showed
significantly higher revenue compared to the other two but its initial cost is significantly
higher. An office tower, on the other hand, should have a substantially higher average
occupancy rate but its expected annual revenue is lower than a boutique hotel or a shopping
mall. Finally, a shopping mall is expected to have slightly higher expected revenue compared
to an office tower and better return on its potential selling price but its expected annual
revenue is lower than that of a boutique hotel.

As I debated all these factors in my head, I realized everyone was staring at me and I
hadn’t spoken for a long time. My boss glared at me, then smiled arrogantly, saying, “Why
don’t you prepare a presentation for the senior executives and explain your decision with its
justifications by the end of the week?” My presentation is in 12 hours and I have yet to reach
a decision. What should I do?

Boutique Hotel
Since the location of the land is close to the attraction areas of the city, building and starting
a hotel might be a good decision. The hotel will offer their customers a unique setting with
upscale accommodations thanks to 80 specially and uniquely designed rooms. The total
estimated building costs is 22 million TL. Based on average prices in the area, we believe we
can charge an average price of 340 TL per room per night, with expectations that the
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average occupancy be 65%. Annual operating costs, which include maintenance, cleaning
services and customer services etc., are forecasted to be 3,695,000 TL.

Office Tower
The plot is located in the art of the financial district of the city, with a plentitude of financial
institutions and headquarters of high-profile corporations nearby. With demand for office
space at an all-time high, an office tower could be ideal. The tower is designed to
accommodate companies of different size and types, maximizing space and occupancy. In
total there will be 67,800 m2 available area to rent, while annual rent is planned to be 55 TL
per m2. The total estimated initial cost is 8.14 million TL and expected average occupancy is
90%. Annual costs, which consist of security, electricity etc., are expected to be around
2,165,000 TL.

Shopping Mall
A quick survey of the neighborhood reveals that the amount of shopping opportunities per
capita (per person) is quite low in the area. Since there are many white-collar workers
nearby, a shopping mall can be a popular destination during the lunch time and after work,
which will attract the interest of fast food chains, upscale restaurants and fast fashion
outlets. The initial cost of the shopping mall is expected to be 10.4 million TL for a total of
105,000 m2 rental zone, which can be rented for 45 TL per m2. Annual operating expense is
anticipated to be 2.45 million TL in total for heating, maintenance and cleaning services etc.
The expected occupancy is to be 80%.

We can assume that construction and initiation of business will take about one year
to complete; following ACME Asset Management will manage and operate each property for
10 years before putting it up for sale on the market. Based on a local property appraiser’s
estimates, the selling prices of a boutique hotel, an office tower and a shopping mall after 10
year of operation should be around 24.5 million TL, 8.25 million TL and 14 million TL,
respectively.

To keep with our current investment portfolio, the company is seeking an annual
return of 12% on the investment. This means that for every 100 TL that the company spends
on investments, we should earn about 12 TL a year.