PHUKET BEACH HOTEL

Valuing Mutually Exclusive Capital Projects

Pamela Angeles
Jason Manalac
Karlo Prado


CASE FACTS
Mike Campbell, General Manager of Phuket
Beach Hotel considered an offer made by
Planet Karaoke Pub.
Planet Karaoke Pub offered to sign a four- year
lease agreement with the hotel for renting
part of the un used space.
Proposal:
A monthly rental fee of 170,000 baht for the first two
years; &
Thereafter, a 5% increment for the next two years
CASE FACTS
Konkrit Manming, the hotels Financial
Controller made the following Analyses:
Planet Karaoke Pub
Various estimates of the up-front renovation costs
ranged between 770,000 & 1,000,000 baht.
Depreciation: Straight-Line Method with zero salvage
value
55,000 baht- pro rata allocation of the costs of facilities
based on the floor area of the space used for the
project

CASE FACTS
Due to the foreseeable increase in activity,
Konkrit would like to charge this project for an
increase in repair & maintenance costs of
10,000 baht.
The pub would pay all utility & other
expenses.

CASE FACTS
Beach Karaoke Pub
The project would require an up-front investment ranging
between 800,000 & 1,200,000 baht.
Other capital investment, including chairs, bar tables.
kitchen set-up, karaoke equipment, would amount to
900,000 baht.
Food & beverage costs 25% of sales
Salaries 16% of sales
Other operating expenses 22% of sales
Depreciation: Equipment & Furniture- SLM with zero salvage
value at the end
Annual capital expenditure- equalled depreciation
CASE FACTS
Estimated total sales would be 4,672,000 baht for
the first year of operation. (64 days per day with
an average check of 200 baht.
Salary expenses would account for 16% of sales.

QUESTION 1
Assess the economic benefits associated with
each of the capital prospects.
Planet Karaoke Pub: Rental Income
Beach Karaoke Pub: Sales Revenue
What is the initial outlay?
Planet Karaoke Pub: Up-front renovation
Beach Karaoke Pub: Up-front investment + other
capital investment

QUESTION 1
What are the incremental cashflows over the
life of the project?

Planet Karaoke Pub Year 0 Year 1 Year 2 Year 3 Year 4
Rental Income 2,040,000 2,040,000 2,142,000 2,249,100
Payments for Overhead 55,000 55,000 55,000 55,000
Increase in R&M -10,000 -10,000 -10,000 -10,000
Depreciation -250,000 -250,000 -250,000 -250,000
Incremental NIBT 1,835,000 1,835,000 1,937,000 2,044,100
Tax Expense 550,500 550,500 581,100 613,230
Incremental NIAT 1,284,500 1,284,500 1,355,900 1,430,870
Add: Depreciation 1,534,500 1,534,500 1,605,900 1,680,870
Up-Front Renovation -1,000,000
Inc. Cash Flow -1,000,000 1,534,500 1,534,500 1,605,900 1,680,870
QUESTION 1
What are the incremental cashflows over the
life of the project?

Beach Karaoke Pub Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
Sales 4,672,000 4,905,600 5,150,880 5,408,424 5,678,845 5,962,787
Increase in R&M -10,000 -10,000 -10,000 -10,000 -10,000 -10,000
Depreciation -350,000 -350,000 -350,000 -350,000 -350,000 -350,000
Food and Beverage -1,168,000 -1,226,400 -1,287,720 -1,352,106 -1,419,711 -1,490,697
Salaries -747,520 -784,896 -824,141 -865,348 -908,615 -954,046
Other Operating Expenses -1,027,840 -1,079,232 -1,133,194 -1,189,853 -1,249,346 -1,311,813
Incremental NIBT 1,368,640 1,455,072 1,545,826 1,641,117 1,741,173 1,846,231
Tax Expense 410,592 436,522 463,748 492,335 522,352 553,869
Incremental NIAT 958,048 1,018,550 1,082,078 1,148,782 1,218,821 1,292,362
Add: Depreciation 1,308,048 1,368,550 1,432,078 1,498,782 1,568,821 1,642,362
Total Investment -2,100,000
Inc. Cash Flow -2,100,000 1,308,048 1,368,550 1,432,078 1,498,782 1,568,821 1,642,362
QUESTION 1
What is an appropriate discount rate to use
for discounting the cashflows of the projects?
WACC Weighted Average Cost of Capital
Phuket Beach Hotel Capital Structure:
75% equity x 12% cost of equity = 0.09
25% debt x 10% interest rate = 0.025
0.09+0.025 = 0.115 -> 11.5% discount rate
QUESTION 2
Rank the projects using various measures of
investment attractiveness.






Do all the measures rank the projects identically?
Why or why not? Which criterion is the best?
Planet Karaoke Beach Karaoke
NPV

3,856,530.82

3,941,788.74
IRR 151% 62%
Packback Period 0.65 1.58
Discounted Payback 0.72 1.85
Profitability Index 3.86 1.88
ROI 1.34 0.70
QUESTION 3
Are the projects comparable based on the standard
NPV measure, given that they have unequal?
No.
What adjustment or alternative method is required in
comparing such projects?
Replacement chain approach or Equivalent Annual
Annuity Method
Planet Karaoke: [EXCEL] PMT(discount rate, # of periods,
NPV) = 1,256,357.01
Beach Karaoke: [EXCEL] PMT(discount rate, # of periods,
NPV) = 945,206.43
QUESTION 4
How sensitive is your ranking to changes in
the discount rate?
Discount Rate Planet Karaoke NPV Beach Karaoke NPV
5.00% Php4,623,358.01 5,311,977.82
6.00% Php4,493,092.13 5,071,702.96
7.00% Php4,367,624.31 4,843,158.06
8.00% Php4,246,724.58 4,625,625.71
9.00% Php4,130,176.25 4,418,439.98
10.00% Php4,017,775.08 4,220,982.28
11.00% Php3,909,328.43 4,032,677.48
11.50% Php3,856,530.82 3,941,788.74
12.00% Php3,804,654.46 3,852,990.51
13.00% Php3,703,581.49 3,681,423.11
14.00% Php3,605,947.29 3,517,511.01
15.00% Php3,511,598.48 3,360,821.26
QUESTION 4
What other key value drivers would affect
the attractiveness of the projects?
Customer satisfaction
Risk aversion
Social responsibility
Estimate the sensitivity of your result to a
change in any of the key value drivers.
QUESTION 5
Which project should the hotel undertake?

PLANET KARAOKE PUB