Case Report : Phuket Beach Hotel Executive Summary Phuket Beach Hotel has space located on second floor of the main building which was underutilized. Planet Karaoke pub was expanding in Thailand and looking for a venue in patong beach area for setting up another outlet. Planet Karaoke Pub found unused space of the hotel most suitable for their new venture.
The space at second floor reserved for the construction of new wing of the hotel which will take atleast two years. Phuket Beach hotel had two options. Option – 1 : Planet Karaoke pub offered to sign a four year lease agreement with the hotel for renting available space and offered 1,70,000 baht for the first two years and at 5% increment for next two years. Assumptions | | | |Rental Income @170000*12 for first two years and 5% increase in next two years | |Straight line depreciation method | | | |Corporate tax @30% | | | |Base capital cost 1,000,000. 0 | | | |Patronage factor : Reduction in room rent revenue by 10% | | | | | | |Financial Performance | | | |NPV |598,705 | | |IRR |38% | | |Payback period Two Years | | |Average Cashflows |519412. 5 | | |Average Return on investments |52% | | |Discount Rate |11. 50% | | Option – 2 : To create their own pub to be called Beach Karaoke pub Assumptions | | | |Growth rate in sales @5% | | | |Food & Beverage Cost – 25% of sales | | | |Other Operating cost – 22% of sales | | | |Salary – Not considered as excess manpower will be used | | |Straight line depreciation method | | | |Corporate tax @30% | | | |Base capital cost 2100,000. 0 | | | |Patronage factor : Reduction in room rent revenue by 10% | | | | | | |Financial Performance | | | |NPV | 2,227,225 | | |IRR |42% | | |Payback period |Two year | | |Average Cashflows | 1,056,980 | | |Average Return on investments |50% | | |Discount Rate |11. % | | Analysis Different evaluation criteria can be used to evaluate the projects. The discount rate is calculated base on information provided. Equity : 75% & Cost Of Equity : 12% Debt : 25% & Cost Of Debts : 10% Weighted Average Cost Of Capital : +75%*12% + 25%*10% = 11. 50% Phuket Beach Hotel usually evaluates capital projects using Average ROI and Payback period which do not considered the time value of money and do not provide an accurate future projection of the investment. The projected financial performance of Beach Karaoke pub is superior to Planet karaoke pub. The associated risk factors with Beach Karaoke project are more. Factors |Beach Karaoke Pub |Planet Karaoke Pub |Favorable investment | |Revenue |Expected |Fixed |Planet | |Patronage factor Impact (Room |Risky |Less risky |Planet | |rent factor) | | | | |Staff Salary |Not Considered |Not Required |Planet | The sensitivity analysis shows that the Planet Karaoke Pub project would be superior to the Beach Karaoke Pub project due to its financial certainty although projected financial performance is in favor of Beach Karaoke Pub.
Beach Karaoke pub project does not considered salary as excess man power is available but if we considered cost of staff salary, Beach Karaoke pub becomes less attractive. There are many factors that cannot be quantified but they need to be addressed for the evaluation of the projects including Security issues. Additional security guards can be hired to maintain law and order but the costs of extra security is not provided for analysis. Recommendation Wanida should suggest an investment recommendation in favor of the Planet Karaoke Club (PKC) project. Reference : On-line segments Text Book – Financial management (Theory & Practices) Phuket Beach Hotel report