McKinsey Medium Market Entry Profitability

Army Hotel

ProHub Comment

This case tests the candidate's ability to structure a market entry decision through financial modeling. The key challenge is identifying that capacity constraints during peak periods significantly reduce projected revenue from $7.8M to $7.2M, extending the breakeven period beyond the firm's investment hurdle. The case rewards structured thinking, attention to operational constraints, and the ability to synthesize financial analysis into a clear recommendation.

Estimated Time 26 minutes
Difficulty Medium
Source Chicago Booth
40 / 100
Our client is a PE firm that has the opportunity to invest in building a 400-room hotel on an army base. The idea was given to the PE firm by the army. The government has decided to give our client the land for free – our client can build the hotel and keep all of the profits. Our client has hired you to find out what they need to know to determine if they should build it or not.

Clarifying Information

The purpose of the hotel is to provide housing for: • Soldiers attending training at the base • Soldiers with temporary transfers to this base

If asked, provide the candidate with the following information:

Competition • There are three existing hotels near the base and each are approximately 20 miles away from it. The nightly rates for each hotel are: – Hilton ($110/night) – Hampton Inn ($75/night) – Days Inn ($40/night)

Occupancy – There are two training classes held at the base: • Basic Officer Training: 200 soldiers per class; class lasts 10 weeks and is held 5 times per year. • Advanced Officer Training: 50 soldiers per class; class lasts 4 weeks and is held 10 times per year. – Temporary housing: Soldiers are transferred every 3 years and are given 15 days to find a permanent place to stay. There are 9,000 active duty soldiers subject to this rotation.

Mock Interview
Interviewer

Our client is a PE firm that has the opportunity to invest in building a 400-room hotel on an army base. The idea was given to the PE firm by the army. The government has decided to give our client the land for free – our client can build the hotel and keep all of the profits. Our client has hired you to find out what they need to know to determine if they should build it or not.

You

Thanks. Before analyzing, I'd like to clarify a few key questions...

Interviewer

Good question. Let me provide some background information...

You

Based on this, I suggest analyzing from these dimensions...

AI Score
Structure Analysis Communication Business Sense Quantitative
Practicing...
Score coming soon
Practice this case with AI Mock Interview

A PE firm evaluates investing in a 400-room hotel on an army base where land is free but profitability is constrained by military occupancy patterns and fixed government reimbursement rates. Analysis reveals a 6-7 year breakeven period exceeds the firm’s 4-5 year target, leading to a negative recommendation.

Key Insights:

  1. Capacity constraints during peak periods (4 months with 80-room shortage) reduce annual revenue by ~$600K
  2. Operating profit of $3.2M per year against $20M upfront investment yields 6-7 year breakeven, exceeding investment criteria
  3. Fixed government per diem of $75/night limits pricing power, even though competitive hotels charge $40-110/night
  4. Revenue generation is limited to three sources: basic training (70K rooms), advanced training (14K rooms), and temporary housing (45K rooms)
  5. Breakeven could be improved through non-room revenue (restaurants, conferences) or cost reduction strategies