An entity was considering purchasing a hotel located in the inner city suburbs of Melbourne. The timing of the purchase was after the Victorian Government had announced reforms to the gaming industry.

The review of the investment took place just prior to the competitive bidding process of venue gaming licences. Hence, the price of individual gaming licences was unknown and therefore was a significant variable input in the cashflows and ultimate value of the hotel under consideration.

The investing entity obtained a valuation of the hotel from a well known valuer. Ferrier Hodgson Forensics:

• Critiqued the valuation obtained and advised whether the valuation methodology applied was valid;
• Engaged Ferrier Hodgson’s hotel consultant to provide his opinion on the future maintainable earnings of the hotel; and
• Input the hotels cashflows (including the purchase of gaming licences at three alternative estimated values) into a financial model which enabled us to calculate the net present value of the hotel, the equity internal rate of return and the level of borrowings required to purchase and operate the hotel.

A report was prepared for the Board of the investing entity detailing the above which enabled them to make an informed decision on whether to proceed with the investment.