Phuket Beach Hotel Essay

326 Words2 Pages
Phuket Beach Hotel 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
Open Document