Caribbean Island – MBB Final Round

RECOMMENDED STRUCTURE

• Instant monetization:
  • Resell to make a profit.
• Recurring profit:
  • Rent to high-wealth individuals.
  • Commercial activities/hospitality.
  • Exploitation of natural resources.
  • Zoo/natural reserve.
• Personal use:
  • Research activities (e.g. on marine species).
  • Personal residence.

Provide the following information if requested:

• The client invested $50M to buy the island.
• The island is buildable.

Ask clarifying questions you need answers to in order to solve the case. 

Provide the following information if requested:

• Island:
  • Diameter: 2 km.
• Villa:
  • Every villa has a 30 m wide garden.
  • Every villa is placed at a distance of 20 m in width from the closest villas.

RECOMMENDED ANSWER

The candidate should realize that:

• As the villas must have direct access to the sea, they must be placed on the coast, i.e. around the circumference of the island.
• Each villa occupies a total of 50 m in width.

Maximum no. of villas = Island’s circumference/Total villa's width = 2 * Pi (≈ 3.14) * 1,000 m / 50 m ≈ 125 villas

An outstanding candidate should ask whether the investment comprises both the acquisition cost of the island and the construction of the resort. The total investment has to consider both, i.e. the acquisition cost of the island should not be considered as sunk.

A good candidate should structure the proper formula to compute the NPV of the investment considering its 3 main components:

• Additional investment to build the resort (to be added to the initial investment already sustained for the island).
• Recurring profits generated by the management of the resort.
• Discount rate (accounting for the time value of money, cost of capital, and risks).

RECOMMENDED ANSWER

A good candidate will note that the NPV of the investment is positive even without considering additional revenues other than the rent of the villas.

An outstanding candidate will perform a risk assessment, thinking about how to hedge against each of the identified risks. 

Main risks to consider:

• The revenue estimate is based purely on forecasted information and a 90% occupancy for 6 months a year can be challenging to achieve.
• Travel/hospitality industry disruption (e.g. economic recessions, pandemics, natural disasters, etc.).

Mitigation actions:

• Build a more accurate, month-by-month backup of forecasted revenues, benchmarking with luxury resorts in the Caribbean and similar locations.
• Consider an insurance policy to provide the client with a constant revenue if occupancy is lower than forecasts.

The candidate should perform a breakeven analysis of the NPV calculation (i.e. NPV = 0 ), using the occupancy during the high season as a variable (let's call it x).

RECOMMENDED ANSWER

• Recommendation:
  • Our recommendation is to build the resort for an additional investment of $60M which results in a positive NPV of $10+M.
• Risks:
  • The revenue estimate is based purely on forecasted information, with the challenging 90% occupancy to be maintained for 6 months a year. However, the forecast is 10 percentage points higher than the breakeven high season occupancy of 80% and the calculation does not include the typical additional revenues of resorts.
  • Travel/hospitality industry disruption (e.g. economic recessions, pandemics, natural disasters, etc.).
• Next steps:
  • Extra revenues should be considered, e.g. services, food & beverage, activities (sports, tours, cooking classes, ...), private transfers, merchandising, luxury boutiques, events, etc. This will improve our NPV.
  • Build a more accurate, month-by-month backup of forecasted revenues.