BFA612: Management and Cost Accounting - Airbnb in Hobart Case Study - Business Finance Assignment Help

Assignment Task:

Objectives of the Assignment:

The objectives of this assignment are to assist in developing effective skills which are crucial to gaining employment and ongoing career success. These skills include:  

1. Critical reasoning and analytical skills; Analyse the revenue, costs and variances for Scenarios case studies to provide answers to specific questions.

2. Knowledge of industry; Research, interpret and apply management accounting techniques and theories specific to Scenarios.

3. Written communication skills: Use interpersonal skills to provide recommendations in the form of a business report.

4. Social responsibility skills; Identify social responsibility and sustainability issues in the business context.

5. Teamwork & leadership skills; Apply teamwork skills to analyse Scenarios. Develop a cohesive team structure and reflect on roles of self and peers.

Case Study: Airbnb in Hobart

Denise, an Australian resident, is a self-funded retiree from Sydney, who is planning, this year, on moving to Hobart and purchasing a home. This will be the first home she had ever purchased. She has been looking at three-bedroom, two-bathroom properties with parking for three cars, and a reasonably sized outdoor entertaining area. Her plan is to live in the property, while letting two of the bedrooms as Airbnb, for up to 4 guests. Currently, she has $700,000 in her account with the Commonwealth Bank. As she has an income stream from her investments of $4,000 per fortnight, she is prepared to put up to $450,000 of her savings (but is somewhat flexible with this figure) towards the purchase of the property, making up the short-fall with a bank-loan. The Commonwealth Bank has already pre-approved her for a home loan of up to $350,000. However, of course, she would like to take on the lowest debt possible, while making the highest possible profit from the Airbnb.

Denise has now approached you, a highly capable Hobart team of management and cost accountants, with an excellent professional reputation, and extensive knowledge of local council regulations. She asks you to research the financial viability of the proposed project and has provided you with two options:

OPTION A: An almost brand-new, high-end property, of 260 m2, in Sandy Bay, on the market for $750,000, including all furnishings and fittings. It meets all of Denise's criteria, has magnificent views over the Casino, and is in close proximity to the central business district (CBD), while having the added advantage of the two guest bedrooms with ensuite bathrooms, a second lounge and kitchenette being located on the ground floor, thereby affording privacy to both herself and her guests. It also has 15 solar panels, providing 4,950 W of power, uses energy-efficient LED lights, providing a $380 saving on the normal quarterly electricity bill, of $900,  and has a 3000 litre rain-water tank, for flushing toilets and watering the garden. While the outdoor area is big enough for entertaining guests, there is no room for a vegetable garden. This property is already operating as an Airbnb, bringing in $250, per room, per night, with a pre-Covid occupancy rate of 99%. The annual council rates are $2,500, and insurance to cover the property, including lability insurance for the Airbnb guests, and all fixtures and fittings is $1,800 per annum.

OPTION B: A spacious, 200 m2, older property in Berriedale, priced at $450,000, with a lovely outlook over the river, and in close proximity to the popular MONA (art gallery). It meets all of Denise’s basic criteria, although all three bedrooms are located on the one level, and the property is in need of a total renovation, to make it fit for purpose. Denise has received an estimate of approximately $150,000 for the renovation work, with an additional $40,000, approximately, for painting, decorating, furnishing, and landscaping, to create a dedicated outdoor entertainment area. This property has not been used as an Airbnb, but similar Airbnbs in the area earn up to $200, per room, per night. The annual council rates are $1,200, and the insurance to cover the property, including liability insurance for the Airbnb guests, and all fixtures and fittings, is $1,000 per annum. The quarterly power bill is currently $450. Denise wants to change to energy-efficient LED lighting, at a cost of $80. This should save her up to $180 on her quarterly power bill. She has also obtained a quote for $6000, for installing solar panels (4,950 W), which will lower her quarterly bill by a further $300, and another for $950, for a 3000 litre rain-water tank for the toilets and watering the garden. The property has a large back garden which is already set up for raising chickens and growing vegetables. There are also a dozen different fruit trees. Denise estimates that for an annual outlay of $200 for feed and fertilisers, she could be self-sufficient in eggs, fruit and vegetables. 

Required

1. You are required as a group to provide estimates/answers, for each option, for the following questions using an excel file (Reference all material taken from other sources):

   1. What is the cost of the property? (Consider both possibilities: market price and market price + 10% as it is currently a sellers' market). Will Denise need a home loan? If so, for how much, and at what interest rate? [hint: use the realestate.com website]
   2. Will she have any other costs to pay, in addition to the purchase price? If so, what they are, and how they are calculated. (hint: use the realestate.com website]
   3. How much will the annual local council rates and insurance cost? (estimate that these may rise by a maximum of 5%)
   4. What is the cost of setting up the accommodation (e.g. renovations, landscaping, decorating and furnishing costs and any Eco-friendly additions)? Will she need a loan for this? If so, for how much, and at what interest rate? 

2. Estimate the number of rental nights (remember the effect of Covid-19). You will need to check if there is any limit on the number of nights an Airbnb in Hobart can be rented out. For example, in London, a property cannot be let out on Airbnb for more than 90 nights, in total, per year.

   1. Will Denise be required to apply for an Airbnb permit? Why/why not? If she does, where will she need to apply for it, and how much will it cost?
   2. What are the estimated operating costs: water, power, internet, food for guests' breakfasts, cleaning, depreciation, rates, insurance, tax, … etc.? (estimate these by taking into consideration any existing or planned Eco-friendly elements of the property)
   3. Calculate the competitive price that Denise should consider.
   4. Calculate the annual profit, using the variable costing system. 
   5. Calculate the breakeven point for the project?
   6. Calculate the investment Payback period, NPV, and IRR. 

3. As a group, write a business report, in which you evaluate Denise's investment proposal. Your report will be evaluated on the criteria listed below:

   1. Technical content i.e. your discussion of the issues should be directly linked to the Denise's investment proposal. Vague and general discussion will not get marks. 

   2. Inclusion of academic and professional material relevant to the topic. It is important that management accounting terminologies and key words are mentioned in your report.

   3. The quality of written communication; The report should be professionally presented (presentation, grammar and spelling); and Use of academic referencing (use Harvard Style referencing).

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