Phuket Beach Hotel: Valuing Mutually Exclusive Capital Projects Essay

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Phuket Beach Hotel: Valuing Mutually Exclusive Capital Projects (Case 27-3) The unused space of the Phuket Beach Hotel was initially meant for the construction of an alley linking to its new wing which would not be completed until two years later. The Planet Karaoke Pub made an offer to Mike Campbell (General Manager, Phuket Beach Hotel) to sign a four –year lease agreement with the hotel for the unused space. It proposed for the following: * A monthly rental fee of 170,000.00 baht for the first two years. Thereafter, a 5% increment for the next two years. * 70% of the unused space (3,000.00 sq. feet) would only be used to give way for the hotel’s construction of the alley. Hence, it was envisaged that the proposed pub would not affect the construction plan of Phuket Beach Hotel. In the hotel’s present capital budgeting system, two criteria are deemed important in project valuation / ranking: * Payback period * Return on investment Upon Mike’s meeting with Kornkrit Manming (Financial Controller, Phuket Beach Hotel), the latter was asked to make an analysis of the project offer. This was done by comparing the offer of Planet Karaoke Pub against the estimated revenues and costs of an alternative wherein the hotel would have a pub for itself. Thus, his corresponding analyses are as follows: Planet Karaoke Pub * Up-front renovation costs ranged between 770,000.00 baht and 1,000,000.00 baht. * With zero salvage value, the costs are depreciated using the straight line method. * Pro-rata allocation of existing overhead expenses (i.e. toilets, elevators, carpets), based on projected floor area used, amounted to 55,000.00 baht. * 10,000.00 baht is charged for the increase in repair and maintenance costs due to increase in activity. * The pub would pay all utility and other expenses. Beach Karaoke Pub * Up-front

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