Phuket Beach Hotel: Valuing Mutually Exclusive Capital Project Essay

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ISSUE Planet Karaoke Pub made an offer for a venue in order to use some unused space owned by Phuket Beach Hotel. With this offer, the hotel will still be able to have the space needed for the construction of an alley linking to a new wing for the hotel in the next two years. However, Mike Campbell, the general manager of the hotel, and Kornkrit Manming, the hotel’s financial controller, they discussed the possibility of building their own karaoke pub. After the evaluation and estimation analysis is done by Kornkrit, he sent it to his assistant Wanida to do more accounting analysis. The objective is to compare these two mutual exclusive projects in order to understand which project is the most valuable and therefore the one that the hotel should choose. ALTERNATIVES There are two options for the hotel: lease option—Planet Karaoke Pub and build option—Beach Karaoke Pub. No matter which option the hotel chooses, they expect the maximum revenue and the minimum expense, and the investment is more valuable than just putting money in the bank and letting the unused space spare. ANALYSIS First of all, we will analyze the cash flows associated with two projects and compare their net present values. Lease option—Planet Karaoke Pub Under this alternative, the hotel will have fixed rental income from Planet Karaoke Pub over 4 years, including taxes; but they should pay the up-front capital investment costs which are between 770,000 and 1,000,000 baht as the initial outlay for the project before leasing. We will see the revenues associated with this project are monthly renting fee of 170,000 for the first 2 years and then 178,500 (5% increment) monthly fee for the last 2 years. The 55,000 baht that regard the allocation of the overhead expenses are not considered as incremental costs because this is only an allocation of a cost that already existed. Also the hotel

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