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Phuket Beach Hotel

In: Business and Management

Submitted By angielaz
Words 1984
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Case 10:Phuket Beach Hotel
VALUING MUTUALLY EXCLUSIVE CAPITAL PROJECTS

Case Overview
Planet Karaoke Pub
Project Lives Monthly rental
(5% increment for 3rd and 4th year)

4 years 170, 000 (THB) 770, 000 to 1, 000, 000 (THB) 55, 000 (THB)

Up front renovation cost
(Depreciated over the life of project - straight line method with zero salvage value)

Overhead expenses

Repair and maintenance cost

10, 000 (THB) / year

Case Overview
Beach Karaoke Pub
Project Lives Up front investment
(Equaled depreciation)

6 years 800, 000 to 1,200 000 (THB) 900, 000 (THB) 4, 672, 000 (THB)

Other investment (Equipment and chairs)
(Depreciated over the life of project - straight line method with zero salvage value)

Estimated total sales (1st year)
(5% average growth per annum)

Operating costs:

Food and beverage costs
Salaries Other operating costs

25% of sales
16% of sales 22% of sales

Repair and maintenance cost

10, 000 (THB) / year

Case Overview
Beach Karaoke Pub  Capital structure (75% equity & 25% debt)  Debt – loan from Siam Commercial Bank – interest rate 10%  Hotel owners’ cost of equity - 12%  Corporate tax rate – 30%  Future profits – discounted 5%  Risk factor – 25%
Conservatism- risk factor (consideration due to the negative factor for pub)

Question 1
Assess the economic benefits associated with each of the capital projects.  What is the initial outlay?  What are the incremental cash flows over the life of the project?  What is an appropriate discount rate to use for discounting the cash flows of the projects?

Initial Outlay
Planet Karaoke Pub

To invest THB 770,000 or THB1,000,000?
Beach Karaoke Pub

To invest THB1,700,000 or THB2,100,000?

Incremental Cash Flows
Planet Karaoke Pub
Year
Annual Cash Flow (THB) -Lower Annual Cash Flow (THB) - Upper

0
-770,000.00 -1,000,000.00

1…...

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