Mercur, the world’s largest hotel chain has been contemplating buying Mohotel and running it as a wholly owned subsidiary. Given information that has been provided by Mohotel on projections for the coming years, we have created a valuation of the worth of the company. The projections we have created are based on a possible expansion that Mohotel’s new leadership has proposed to improve the efficiency of their operations. These projections are looking forward and based on financial statements dated 12/31/2014.
Based on our analysis of Mohotel through the year 2021, we have found that a price range of $2,400,000,000 to $3,700,000,000 would be reasonable. Referring to our base valuation in which we valued Mohotel based on the idea that sales would increase by 5%,9%,9%,10%,8%,5%, and 3% respectively over the next seven years and eventually settle on a 2% growth rate due to the maturity of the industry, we found that the present value of the company would be about $2,776,000,000. This includes an expected reduction of operating costs of 1.5% through reductions in cost of goods sold and S,G, and A. Mohotel management also provided us with information regarding their planned reduction of investments in working capital through increased inventory and receivable turns of 3% and sales of prepaid rooms and gift card, reducing operating current liabilities by 5% of sales. The company also expects a change in how depreciation is calculated to 6.5% of the beginning of the year net PPE. The depreciation calculations are show on our base valuation in Table 2.
In developing reasonable prices for the purchase of Mohotel we considered a few alternate scenarios for while we created alternate valuations. We first considered the possibility that Mohotel was overly ambitious in their growth estimates for the coming years. This led to our pessimistic valuation in which we estimated