Wayside Case
WAYSIDE INN INC CASE STUDY
2. Company Analysis
Wayside Inns was formed in 1980 as the successor to United Motels Enterprises, a company that operated several franchised motels under licensing agreements from two national chains. Wayside has been experiencing brisk business and is currently operating at near full capacity. To capture more business Wayside is considering a 40-room expansion for the motel. We shall evaluate the company using a SWOT analysis.
Threats
- Competitors are expected to expand
- New customers may get shifted to other competitors due to lack of space in Wayside
3. Evaluation of the Proposed Investment
It is provided in exhibit 3 of the case that Wayside turned away an average of 9,181 customers in a year. If Wayside were to expand, these turnaway would generate additional revenue to the company. Besides, as shown in the SWOT analysis, new customers may get shifted to other competitors and this puts Wayside at a disadvantage. Nonetheless, the increase in revenue for the company will not serve as a good reason for the company to expand. It all depends on the returns with respect to the capital invested. Here we shall look at 1) return on investment (ROI) and 2) internal rate of return (IRR). 1. Return on Investment Indicator | Current | Upon expansion | ROI | 27.06% | 24.25% |
At first sight, we will realize that upon expansion, the return on investment of the company immediately drops by 2.81% and this may seem like a bad investment. However, we need to delve deeper to decide if ROI is a good indicator. ROI measures the net income over the total investment. One problem with ROI is that it will increase when capital assets depreciate. The ROI in the first year may be lower but thereafter it will increase, rendering this indicator ineffective to determine if they should take on the project. Another point to note is that investments that are above the company’s cost of capital should be undertaken as it adds value to the
2. Company Analysis
Wayside Inns was formed in 1980 as the successor to United Motels Enterprises, a company that operated several franchised motels under licensing agreements from two national chains. Wayside has been experiencing brisk business and is currently operating at near full capacity. To capture more business Wayside is considering a 40-room expansion for the motel. We shall evaluate the company using a SWOT analysis.
Threats
- Competitors are expected to expand
- New customers may get shifted to other competitors due to lack of space in Wayside
3. Evaluation of the Proposed Investment
It is provided in exhibit 3 of the case that Wayside turned away an average of 9,181 customers in a year. If Wayside were to expand, these turnaway would generate additional revenue to the company. Besides, as shown in the SWOT analysis, new customers may get shifted to other competitors and this puts Wayside at a disadvantage. Nonetheless, the increase in revenue for the company will not serve as a good reason for the company to expand. It all depends on the returns with respect to the capital invested. Here we shall look at 1) return on investment (ROI) and 2) internal rate of return (IRR). 1. Return on Investment Indicator | Current | Upon expansion | ROI | 27.06% | 24.25% |
At first sight, we will realize that upon expansion, the return on investment of the company immediately drops by 2.81% and this may seem like a bad investment. However, we need to delve deeper to decide if ROI is a good indicator. ROI measures the net income over the total investment. One problem with ROI is that it will increase when capital assets depreciate. The ROI in the first year may be lower but thereafter it will increase, rendering this indicator ineffective to determine if they should take on the project. Another point to note is that investments that are above the company’s cost of capital should be undertaken as it adds value to the