Phuket Beach Hotel

3020 Words Apr 21st, 2014 13 Pages
Financial Management. EBS ML. 4th course students. Case study. Phuket Beach Hotel. Valuing Mutually Exclusive Capital Projects. Questions 1. Please asses the economic benefits associated with each of the capital project. What is 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 project? SN 1 and SN 2 - 40%

2. Are the project comparable based on the standard NPV measure, given that they have unequal lives? What adjustment or alternative method is required in comparing such project? - 10% SN 3

3. How sensitive is your ranking to changes in the discount rate? What other "key value drivers" would affect the attractiveness of
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In evaluating the project in this case, we should focus on those cash flows that occur if and only if we accept project. These cash flows, called incremental cash flows, represent the changes in the firm's total cash flow that occurs as a direct result of accepting the project. ( c ) Ignore sunk cost: a sunk cost is an outlay that has already been committed or that has already occurred, hence is not affected by the decision under consideration. In this case, the overhead and salary expenses of the excess labor can be considered as sunk cost.

See SN 4 Sensitivity analyses: Cost of Capital PVIFA =[(1+k)n - 1]/k 8% PVIFA =[(1+k)n - 1]/k WACC% PVIFA =[(1+k)n - 1]/k 12 % PVIFA =[(1+k)n - 1]/k 14% PVIFA =[(1+k)n - 1]/k 16% PVIFA =[(1+k)n - 1]/k 18% PVIFA =[(1+k)n - 1]/k 20% PVIFA =[(1+k)n - 1]/k 22%

PVIFA 3.31210 3.11908 3.03730 2.91370 2.79820 2.69010 2.58870 2.49361

Rate 0.0800 0.1075 0.1200 0.1400 0.1600 0.1800 0.2000 0.2200

NPV 275944.11 214849.48 188992.20 149885.44 113352.73 79173.36 47149.40 17103.01

EAA 83313.94 68882.38 62223.75 51441.62 40509.16 29431.38 18213.54 6858.74

2.46 3.01 0.64 23% 18% 1.28 214849 68882.36 3.11908

both project.

EXHIBIT TN-2 THE LEASE OPTION: PLANET KARAOKE PUB - ANALYSIS OF OPERATING CASHFLOW Decrease in net room revenue 25% 0% 6.25% 12.50% 18.75% 25.00%

Project life Upfront investment renovation equipment Tax rate Cost of capital (WACC %) Sales growth rate Food and beverage cost Salary Other operating expense

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