Five Seasons Hotel is a chain with 10 hotels. Strategically, the chain implements a cookie-cutter approach to building and running its hotels, in that all hotels are practically identical. Five Seasons invested $150 million in acquiring the land for all hotels and $500 million in building and furnishing the 10 hotels to a guest-ready stage. Each hotel has 150 rooms. Each room has a rack rate of $200 per night but the hotel gives an average of discount of $30 per night off this base price. Each hotel costs $1 million in materials to run, and is staffed by 58 employees, each paid an average compensation of $50,000 a year. This staffing level implies a certain service level, which together with the rack rate and discount, determines the chain’s average occupancy rate—the percent of available rooms sold—in this approximate way:
Chain-wide average occupancy rate = 0.01´number Of Employees Per Hotel
- ( 0.0015 ´base Price ) + ( 0.01 ´ discount),
Subject to a maximum of 100% and minimum of 0% (base Price and discount are expressed in [$]). The company operates 365 nights a year.
What is the ROIC?