THE GERANI INVESTMENT

CASE FOR INTERNATIONAL FINANCE CLASS

By 1992, Ted, a US investor, born in Greece, in fact in Crete,  begins to operate a hotel on the island of Crete in Greece. The government of Greece eager to attract foreign exchange subsidizes hotel development in the context of European Union law. The subsidy occurs in two forms. The first, the cost of the project, it subsidizes to the extent of 40%, so it will grant him $2 million on its $5 million cost. The second is it pays 55 % of the interest rate(i), which in 1992 is .15 and which total interest translates to $400,000 annually. The components of the investment are $1 million of his own equity, $2 million of debt and $2 million of subsidy he receives from the European Union. The law allows a 20 year straight line depreciation.
The hotel which Ted and Lefi, his partner in Greece, develop will have 100% occupancy during June-September and 60% occupancy in March, April, May and October.. The operational expenses are 85% of the revenues. The nightly charge is 22,500 drachmae, and the ER is 150 Dr/$. The hotel also has 5 meeting rooms of varying capacities and 3 restaurants and 3 bars. They generate about $1 million sales out of which 20% is the net profit margin. From 92 till 2000 the hotel has 180 rooms, but by 2000 it grows and has 230 rooms. They also build an upscale restaurant, which unfortunately does not do well, so its contribution to profit is minimal. However, the meeting rooms and other restaurants do exceptionally well, and they generate double the sales they generated in the first 8 years per year.
By 2000, Greece enters into the euro. The hotel develops a reputation, and is in great demand by tourists, and so it raises its prices to $250 per night in equivalent euros, of course. In 2007 they sell the hotel to a group of people who manage a lot of other hotels for about 22 million euros. At that point the ER is about $1.4 per euro. Additionally to the aforementioned, we also know the following. The tax rate is 50%, the bheta of the Gerani hotel is 3, the Greek T bond rate is 10% and the risk premium is 7%. Rates of interest on small hotels equivalent to this hotel are 15%.Depreciation is done over 20 years.

1-You need to do the calculation for NPV then analyze the profitability of the Gerani investment using an NPV approach, We need to show the derivation of net present value.
2-Our grade is based on the conviction, correctness, elaboration and elucidation of our answers.