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    Phuket Beach Hotel: Valuing Mutually Exclusive Capital Projects

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    lusiameilinda
    The document compares two capital project options for an unused space at Phuket Beach Hotel: 1) A 4-year lease to rent space to Planet Karaoke Pub or 2) Building their own Beach Karaoke Pub over 6 years. The Beach Karaoke Pub has higher estimated sales and net returns. Analysis of NPV, IRR, MIRR and other metrics show the Beach Karaoke Pub has better financial outcomes and is the recommended option to maximize profitability.

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    Phuket Beach Hotel: Valuing Mutually Exclusive Capital Projects

    Uploaded by

    lusiameilinda
    854 views33 pages
    The document compares two capital project options for an unused space at Phuket Beach Hotel: 1) A 4-year lease to rent space to Planet Karaoke Pub or 2) Building their own Beach Karaoke Pub over 6 years. The Beach Karaoke Pub has higher estimated sales and net returns. Analysis of NPV, IRR, MIRR and other metrics show the Beach Karaoke Pub has better financial outcomes and is the recommended option to maximize profitability.

    Original Description:

    Research on choosing mutually exclusive project of two alternatives for Phuket Beach Hotel

    Original Title

    Phuket Beach Hotel

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    The document compares two capital project options for an unused space at Phuket Beach Hotel: 1) A 4-year lease to rent space to Planet Karaoke Pub or 2) Building their own Beach Karaoke Pub over 6 years. The Beach Karaoke Pub has higher estimated sales and net returns. Analysis of NPV, IRR, MIRR and other metrics show the Beach Karaoke Pub has better financial outcomes and is the recommended option to maximize profitability.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    854 views33 pages

    Phuket Beach Hotel: Valuing Mutually Exclusive Capital Projects

    Uploaded by

    lusiameilinda
    The document compares two capital project options for an unused space at Phuket Beach Hotel: 1) A 4-year lease to rent space to Planet Karaoke Pub or 2) Building their own Beach Karaoke Pub over 6 years. The Beach Karaoke Pub has higher estimated sales and net returns. Analysis of NPV, IRR, MIRR and other metrics show the Beach Karaoke Pub has better financial outcomes and is the recommended option to maximize profitability.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 33

    PHUKET

    BEACH
    HOTEL
    VALUING MUTUALLY
    EXCLUSIVE CAPITAL
    PROJECTS
    CASE
    BACKGROUND​

     Phuket Beach Hotel has unused space


    and considered using it for 2 project choices :​
     4 years lease renting agreement with
    Planet Karaoke Pub​
     Build Beach Karaoke Pub, 6
    years construction project owned by hotel​
    CASE DETAILS  The estimated Beach Karaoke total sales
    amounting to 4.672.000 baht and 5% sales
    growth per annum
     The estimated Planet Karaoke rental Fee
    amounting to 170.000 baht / month for
    the first 2 years, 5% increment for next two
    years
     The 25% fear factor is applied

     The weighted average cost of capital is 10.75%


    NET ROOM REVENUES

    YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 YEAR 6

    13.200.000 13.464.000 14.137.000 14.844.000 15.140.000 15.443.000


    ASSUMPTIONS
    Initial Investment

    Planet Karaoke Pub Beach Karaoke Pub

     Renovation Cost : 770k – 1000k  Renovation Cost : 800k – 1200k


    baht​ baht​
     Repair & Maintenance Cost : 10k  Other Capital Investment : 900k
    baht p.a (inc. Rental fee)​ baht​
     Sunk Cost : 55k baht  Repair & Maintenance Cost : 10k
    baht p.a
     Sunk Cost : 55k baht
    ASSUMPTIONS
    Operating Costs
     Food & Beverage costs : 25% of sales

     Salaries : 16% of sales

     Other operating expenses : 22% of sales

     Depreciation : equipments & furnitures depreciated equally over the life of the
    project using the straight line method, with zero salvage value at the end​
     Annual Capital Expenditure : Equal Depreciation​
    DEPRECIATIONS
    OPERATING CASHFLOW - PLANET

    323.750 300.650 313.612 251.300

    341.000 317.900 330.412 268.550


    OPERATING CASHFLOW - BEACH

    656.312 719.878 751.989 785.675 860.102 938.932

    676.312 739.878 771.989 805.675 880.102 958.932


    PAYBACK PERIOD
    Planet Karaoke Pub Beach Karaoke Pub
    PAYBACK PERIOD
    Planet Karaoke Pub Beach Karaoke Pub

    Upper Limit 3.04 Years Upper Limit 2.89 Years

    Lower Limit 2.46 Years Lower Limit 2.43 Years


    DISCOUNTED PAYBACK PERIOD
    Planet Karaoke Pub Beach Karaoke Pub
    DISCOUNTED PAYBACK PERIOD
    Planet Karaoke Pub Beach Karaoke Pub

    Upper Limit 4 Years Upper Limit 3.59 Years

    Lower Limit 3.01 Years Lower Limit 2.94 Years


    RETURN ON INVESTMENT
    Planet Karaoke Pub Beach Karaoke Pub
    RETURN ON INVESTMENT
    Planet Karaoke Pub Beach Karaoke Pub

    ROI Upper Limit 1.61% ROI Upper Limit 5.42%

    ROI Lower Limit 3.40% ROI Lower Limit 7.38%


    IRR AND MIRR
    Internal Rate Return (IRR)

    is an indicator of the level of efficiency of an investment, where a project


    can be run if the rate of return is greater than other project / other
    investment.​

    Modified Internal Rate Return​ (MIRR)

    The Modified Internal Rate of Return (MIRR) method assumes that


    positive cash flow will be reinvested in the company's capital costs and
    the initial outlay is financed by company financing. Conversely, the rate
    of return Internal Rate of Return (IRR) only assumes cash flow from a
    project is reinvested in the IRR itself.
    PROFITABLITY INDEX
    The profitability index is an index that attempts to identify
    the relationship between the costs and benefits of a
    proposed project through the use of a ratio calculated as :

    PV of Future Cash Flow


    Initial Investment
    IRR AND MIRR PLANET KARAOKE PUB

    PI Lower Limit 1.21

    IRR Lower Limit 20.78% MIRR Lower Limit 16.26%

    PI Lower Limit 0.99

    IRR Upper Limit 10.21% MIRR Upper Limit 10.44%


    IRR AND MIRR BEACH KARAOKE PUB

    PI Lower Limit 1.93

    IRR Lower Limit 36.95% MIRR Lower Limit 23.57%

    PI Lower Limit 1.60

    IRR Upper Limit 28.46% MIRR Upper Limit 19.81%


    SENSITIVITY ANALYSIS OF MIRR
    In general, both
    projects can be run
    because the MIRR
    value is still positive
    even after entering the
    element of cost of
    capital (WACC)

    However, when
    compared, the Beach
    Karaoke Pub project is
    potentially more
    profitable than Planet
    Karaoke
    NET PRESENT VALUE - PLANET

    NPV Upper Limit (11.179)


    NET PRESENT VALUE - PLANET

    NPV Lower Limit 165.017


    NET PRESENT VALUE - BEACH

    NPV Upper Limit 1.265.602


    NET PRESENT VALUE - BEACH

    NPV Lower Limit 1.580.378


    EQUIVALENT ANNUAL ANNUITIES (EAA)
    SENSITIVITY ANALYSIS OF NPV
    SENSITIVITY ANALYSIS OF NPV
    SENSITIVITY ANALYSIS OF NPV
    RISKS

     PROJECT RISK
     HUMAN RESOURCE RISK
     MONETARY RISK
     MARKETING RISK
     PRODUCTION RISK
     SECURITY RISK
     FORCE MAJEURE
    OPPORTUNITY & SUNK COST

     Salaries

     Sales Declining
    Year 1 2 3 4 5 6
    Risk Factor (25%) (1.650.000,00) (1.683.000,00) (1.767.125,00) (1.855.500,00) (1.892.500,00) (1.930.375,00)

     Maintenance Cost
    IMPORTANT ASPECTS
     MAIN SERVICE

     SUPPORTING SERVICE

     EXTERIOR DESIGN

     INTERIOR DESIGN
    RECOMMENDATION

     Phuket Beach Hotel build its own Karaoke, Beach Karaoke


    Pub
     Great opportunity in karaoke Industry

     Organic Business Development

     Inorganic Business Development


    THANK YOU

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