Phuket Beach Hotel Final

Phuket Beach Resort Case Analysis
Graduate School of Business
De La Salle University
I. Statement of the Problem
Should the management of Phuket Beach Resort accept the offer made by
Planet
Karaoke Pub to set up an outlet inside the hotel or should the
management
operate a pub, Beach Karaoke Pub, by itself?
II. Case Background
Mike Campbell, General Manager of Phuket Beach Hotel is considering an

offer
made by Planet Karaoke Pub, a fast expanding company, which is looking
for a
venue in Patong beach area for setting up another outlet. The Board of
Directors
of the establishment had previously rejected several old offers because
it offers
low return on investment.
The space was located on the second floor of the main building and was
very
much under-utilised. Planat Karaoke Pub offered to sign a four-year
lease
agreement with the hotel for rending part of the unused space. It
proposed to
pay:
a. a monthly rental fee of 170,000 baht for the first two years;
and
b. thereafter, a 5% increment for the next two years.
Planet Karaoke Pub required only 70% of the unused space measuring 3,000
sq.
feet. This would allow the hotel to keep the remaining space for the
creation of an
alley two years later.
Mike Campbell is contemplating on creating a pub operated by the

management
of the hotel itself since such establishments attract a lot of customers
and
tourists.
Mike Campbell sought the assistance of Kornkrit Manming, the hotel’s

Financial
Controller to review the offer from Planet Karaoke Pub and estimating
revenues
and costs associated with an alternative project, Beach Karaoke Pub.
III. Objectives
With the given two alternatives on hand, this case aims to:
a. come up with a concrete recommendation to the board of

directors
of Phuket Beach Resort of which of the two alternatives will
offer a higher
return on investment
b. determine if operating a pub in the hotel, whether by a

third party or
by management, will be a good investment on the part of the
hotel.
c. compute for the relevant cashflows associated with each

projects
Submitted by:
R. Bagunas, S. Chua, C. De Guzman, N. Padon, D. Palmones, J. Valeros, O. Velarde
1
Submitted to:
Prof. R. Queddeng
d. identify the different criteria to be used in

evaluating the projects
e. assess the economic benefits associated with each of the

capital
projects
f. rank the projects using various

measures of investment
attractiveness
g. compare the two projects based on the standard NPV

measure
a. Assumptions
2. The estimated total sales amounting to 4,672,000 baht for the first
year of
operation is a reasonable estimate and thus was applied with the 5%
sales
growth per annum.
3. The 25% fear factor is applied on the projected annual net room
revenue
representing 50% of the pub revenue – 50% from hotel guests.
4. Overhead expenses allocated to the Planet Karaoke Pub project

amounting
to 55,000 baht and 16% of sales representing salaries for the Beach
Karaoke
Pub project are considered irrelevant costs since these costs will
not differ
between alternatives. Both are allocated costs.
5. The weighted average cost of capital is 10.75% computed using 10%

interest rate and 12% hotel owners’ cost of equity on its capital
structure
consisting of 25% debt and 75% equity respectively. The cost of
equity is
assumed to be after tax.
6. All payments and inflows assumed to have been made at the end of
the
year.
a. Areas of Consideration
7. The two projects have unequal lives: Planet Karaoke Pub to run for
4 years
while Beach Karaoke Pub to run for 6 years.
8. It was envisaged that the proposed pub would not affect the hotel’s
future
expansion plans.
9. The existing system ranked projects according to their average

return on
investment and payback period, regardless to the time value of
money.
10.Similar development proposals had been rejected by the board

because it
required a long payback period. Other proposals were also discarded
due to
its low return on investment.
Submitted by:
2
Submitted to:
Prof. R. Queddeng
11.Staff for the karaoke pub could be recruited internally because the
hotel had
excess manpower and the excess staff had long-term contracts with
the
hotel.
12.Both projects have the same repairs and maintenance costs.
13.The Chief Security Officer had expressed his concerns and

displeasure over
the security problems that a karaoke pub might bring. This might
attract
unwelcome guests from outside and might in turn be a negative
factor for
the pub in terms of attracting tourists travelling with children,
which
accounted for 25% of the total patronage. This risk factor will be
present in
both the “lease” and “build” option.
a. Alternative Courses of Action
14. Planet Karaoke Pub
Phuket Beach Hotel to rent out an unused space owned by the

Hotel
located on the second floor of the main building.
Advantages:
 Additional source of revenue
 Steady source of revenue in the form of “fixed” monthly
rental
 Take advantage of unutilised space
 Tie-up with a company that is expanding fast in the
country
(“positive image”)
 Company is exposed to lesser risk since it will be a third
party who
will be doing majority of the investment of the pub
Disadvantages:
 Will entail additional costs and investment
 Limited control over overall pub operations
 Problem on allocating overhead costs
15. Beach Karaoke Pub
Phuket Beach Hotel to create its own pub
Advantages:
 Venture into a lucrative business spreading fast in the
country
 Have control over overall pub operations
 Additional source of revenue
 Complementary pub operation with its hotel business
Disadvantages:
Submitted by:
3
Submitted to:
Prof. R. Queddeng
 Entails costs and investment

 Presents financial risk to the company should the pub do
not perform
as expected.
 Phuket management lacks experience or expertise on this new
segment of business
 Opportunity cost of 25% of the patronage may be lost when
tourist
felt it unsafe.
 No study was presented whether a pub fits on the Phuket
hotel.
a. Analysis of the Case
16.Assess the economic benefits associated with each of the capital

projects.
What is the initial outlay? What are the incremental cashflows over
the life
of the project? What is an appropriate discount rate to use for
discounting
the cashflows of the project?
The initial outlay for each alternative would depend on whether

management is
willing to undertake a risk in operating a business with perceived
"security"
issues. For ACA 1: Planet Karaoke Pub, it has an option of whether to
invest
770,000 baht or 1,000,000
baht as initial outlay.
As for ACA 2: it could either spend 1,700,000 baht or 2,100,000 baht
depending on available funds and depending on payback period criteria.
Should management opt for a shorter payback period, then naturally, it
would
have to spend
on the lower range of its option investment amount.
Factor at 10.75%
Weighted average cost of capital:
1 0.903 0.903
debt equity
2 0.815 1.718
composition 25% 75%
3 0.736 2.454
rate 10% 12%
4 0.665 3.119
= (0.25*0.10)(1-0.30)+(0.75*0.12) = 10.75%
5 0.600 3.719
6 0.542 4.261
25% fear factor: Year 1 Year 2 Year 3
Year 4 Year 5 Year 6
13,200,000.0 14,137,000.0
15,140,000.0
net room revenue 0 13,464,000.00 0
14,844,000.00 0 15,443,000.00
6,600,000.0 7,068,500.0
7,570,000.0 7,721,5
50% hotel guests -pub 0 6,732,000.00 0
7,422,000.00 0 00.00
25% reduction in 1,650,000.0 1,767,125.0
1,892,500.0
revenue 0 1,683,000.00 0
1,855,500.00 0 1,930,375.00
Planet Karaoke Pub: 4 years

Depreciation upper limit
lower limit
1,000,000.0
770,000.0
Cost 0
0
Submitted by:
4
Submitted to:
Prof. R. Queddeng
/ years 4
4
250,000.0
192,500.0
annual depreciation 0
0
Operating Cash Flow (Lower Limit) Year 1 Year 2

Year 3 Year 4
2,040,000.0
2,040,000.0 2,142,000.0 2,142,000.0
Rental income 0 0
0 0
(1,650,000.0 (1,683,000.0
(1,767,125.0 (1,855,500.0
less: 25% fear factor 0) 0)
0) 0)
390,000.0 357,000.0
374,875.0 286,500.0
Net rental income 0 0
0 0
(10,000.0 (10,000.0
(10,000.0 (10,000.0
less: relevant expenses 0) 0)
0) 0)
(192,500.0 (192,500.0
(192,500.0 (192,500.0
depreciation 0) 0)
0) 0)
187,500.0 154,500.0
172,375.0
Net Income Before Tax 0 0
0 84,000.00
(56,250.00
(46,350.00 (51,712.50 (25,200.00
Less (30% Tax) ) )
) )
131,250.0 108,150.0
120,662.5
Net Income 0 0
0 58,800.00
192,500.0 192,500.0
192,500.0 192,500.0
Depreciation 0 0
0 0
323,750.0 300,650.0
313,162.5 251,300.0
Operating Cash Flow 0 0
0 0
note: overhead expense, being an allocated cost, is not relevant.

Operating Cash Flow (UpperLimit) Year 1 Year 2
Year 3 Year 4
2,040,000.0
2,040,000.0 2,142,000.0 2,142,000.0
Rental income 0 0
0 0
(1,650,000.0 (1,683,000.0
(1,767,125.0 (1,855,500.0
less: 25% fear factor 0) 0)
0) 0)
390,000.0 357,000.0
374,875.0 286,500.0
Net rental income 0 0
0 0
(10,000.0 (10,000.0
(10,000.0 (10,000.0
less: relevant expenses 0) 0)
0) 0)
(250,000.0 (250,000.0
(250,000.0 (250,000.0
depreciation 0) 0)
0) 0)
130,000.0
114,875.0
Net Income Before Tax 0
97,000.00 0 26,500.00
(39,000.00
(29,100.00 (34,462.50 (7,950.00
Less (30% Tax) ) )
) )
Net Income 91,000.00 67,900.00
80,412.50 18,550.00
250,000.0 250,000.0
250,000.0 250,000.0
Depreciation 0 0
0 0
341,000.0 317,900.0
330,412.5 268,550.0
Operating Cash Flow 0 0
0 0
Alternative 1 (scenario one): Planet Karaoke Pub (Lower Limit)
Submitted by:
5
Submitted to:
Prof. R. Queddeng
NPV of
Year(s) Amount
PV factor cash flows
Annual Operating Cash Flow 1 323,750.00
0.903 292,346.25
2 300,650.00
0.815 245,029.75
3 313,162.50
0.736 230,487.60
4 251,300.00
0.665 167,114.50
Renovation costs 0 770,000.00
1.000 (770,000.00)
164,978.10
Alternative 1 (scenario two): Planet Karaoke Pub (Upper Limit)
NPV of
PV
Year(s) Amount factor
cash flows
341,000.0 0.90
Annual Operating Cash Flow 1 0 3
307,923.00
317,900.0 0.81
2 0 5
259,088.50
330,412.5 0.73
3 0 6
243,183.60
268,550.0 0.66
4 0 5
178,585.75
1,000,000.0 1.00
Renovation 0 0 0
(1,000,000.00)
(11,219.15)
Beach Karaoke Pub: 6 years

Depreciation upper limit
lower limit
1,200,000.0
800,000.0
Capital investment 0
0
900,000.0
900,000.0
Other capital investment 0
0
2,100,000.0
1,700,000.0
Total capital invesment 0
0
/ years 6
6
350,000.0
283,333.3
annual depreciation 0
3
Net Income After Tax (Lower Limit)

4,905,600.0
5,408,424.0
Revenues 4,672,000.00 0 5,150,880.00
0 5,678,845.20 5,962,787.46
(1,683,000.0
(1,855,500.0 (1,892,500.0
less: fear factor (25%) (1,650,000.00) 0)
(1,767,125.00) 0) 0) (1,930,375.00)
3,222,600.0
3,552,924.0
Net Revenue 3,022,000.00 0 3,383,755.00
0 3,786,345.20 4,032,412.46
Less:Relevant Expenses
Food and beverage (1,226,400.0
(1,352,106.0 (1,419,711.3
(25%) (1,168,000.00) 0)
(1,287,720.00) 0) 0) (1,490,696.87)
(1,079,232.0
(1,189,853.2 (1,249,345.9
Other operating (22%) (1,027,840.00) 0)
(1,133,193.60) 8) 4) (1,311,813.24)
(10,000.00
(10,000.00 (10,000.00
Repairs (10,000.00) )
(10,000.00) ) ) (10,000.00)
Submitted by:
R. Bagunas, S. Chua, C. De Guzman, N. Padon, D. Palmones, J. Valeros, O.
Velarde 6
Submitted to:
Prof. R. Queddeng
(283,333.3
(283,333.3 (283,333.3
Depreciation (283,333.33) 3)
(283,333.33) 3) 3) (283,333.33)
623,634.6
717,631.3
Net Income 532,826.67 7
669,508.07 9 823,954.62 936,569.02
(187,090.4
(215,289.4 (247,186.3
Less: Tax (30%) (159,848.00) 0)
(200,852.42) 2) 9) (280,970.71)
436,544.2
502,341.9
Net Income After Tax 372,978.67 7
468,655.65 7 576,768.24 655,598.31
283,333.3
283,333.3
Add: Gross Depreciation 283,333.33 3
283,333.33 3 283,333.33 283,333.33
719,877.6
785,675.3
656,312.00 0
751,988.98 0 860,101.57 938,931.65
note: salaries 16% is not relevant since workforce will be coming from
hotel staff.
Alternative 2 (scenario one): Beach Karaoke Pub (lower limit)
NPV of
PV
Year(s) Amount
factor cash flows
800,000.0
1.00 (800,000.0
Initial investment 0 0 0
0)
900,000.0
1.00 (900,000.0
Other capital investment 0 0 0
0)
656,312.0
0.90
Annual Operating Cash Flow 1 0 3
592,649.74
719,877.6
0.81
2 0 5
586,700.24
751,988.9
0.73
3 8 6
553,463.89
785,675.3
0.66
4 0 5
522,474.08
860,101.5
0.60
5 7 0
516,060.94
938,931.6
0.54
6 5 2
508,900.95
1,580,249.84
Net Income After Tax (Upper Limit)

Year 1 Year 2 Year
3 Year 4 Year 5 Year 6
5,150,880.0 5,678,845.2 5,962,787.4

Revenues 4,672,000.00 4,905,600.00 0
5,408,424.00 0 6
less: fear factor (1,650,000.0
(1,767,125.0 (1,855,500.0 (1,892,500.0 (1,930,375.0
(25%) 0) (1,683,000.00) 0)
0) 0) 0)
3,383,755.0 3,786,345.2 4,032,412.4

Net Revenue 3,022,000.00 3,222,600.00 0
3,552,924.00 0 6
Less:Relevant
Expenses
Food and (1,168,000.0
(1,287,720.0 (1,352,106.0 (1,419,711.3 (1,490,696.8
beverage (25%) 0) (1,226,400.00) 0)
0) 0) 7)
Other operating (1,027,840.0
(1,133,193.6 (1,189,853.2 (1,249,345.9 (1,311,813.2
(22%) 0) (1,079,232.00) 0)
8) 4) 4)
Submitted by:
R. Bagunas, S. Chua, C. De Guzman, N. Padon, D. Palmones, J. Valeros, O.
Velarde 7
Submitted to:
Prof. R. Queddeng
(10,000.00 (10,000.00
(10,000.00 (10,000.00 (10,000.00
Repairs )
(10,000.00) ) ) ) )
(350,000.0 (350,000.0
(350,000.0 (350,000.0 (350,000.0
Depreciation 0) (350,000.00) 0)
0) 0) 0)
602,841.4
757,287.9 869,902.3
Net Income 466,160.00 556,968.00 0
650,964.72 6 5
(139,848.0 (180,852.4
(195,289.4 (227,186.3 (260,970.7
Less: Tax (30%) 0) (167,090.40) 2)
2) 9) 1)
Net Income After 421,988.9
530,101.5 608,931.6
Tax 326,312.00 389,877.60 8
455,675.30 7 5
Add: Gross 350,000.0
350,000.0 350,000.0
Depreciation 350,000.00 350,000.00 0
350,000.00 0 0
771,988.9
880,101.5 958,931.6
676,312.00 739,877.60 8
805,675.30 7 5
note: salaries 16% is not relevant since workforce will be coming from hotel
staff.
Alternative 2 (scenario two): Beach Karaoke Pub (Upper Limit)
NPV of
Year(s) Amount
1,200,000.0
Initial investment 0 0
1.000 (1,200,000.00)
900,000.0
Other capital investment 0 0
1.000 (900,000.00)
676,312.0
Annual Operating Cash Flow 1 0
0.903 610,709.74
739,877.6
2 0
0.815 603,000.24
771,988.9
3 8
0.736 568,183.89
805,675.3
4 0
0.665 535,774.08
880,101.5
5 7
0.600 528,060.94
958,931.6
6 5
0.542 519,740.95
1,265,469.84
The appropriate discount rate to use for discounting the cashflows of

the
project would be the weighted average cost of capital computed using
the
provided percentages of debt and equity (25% and 75%) together with
their
relevant pre-tax rates - 10% and 12%, respectively. Applying the
after-tax rate
for debt, assuming the cost of equity is already after tax, would get
an after-tax
rate of 7% multiplied by 25% for a total of 1.75% for debt. Likewise
for equity,
multiplying its "after-tax" rate of 12% by its relevant weight, 75%
and will get
9.00% for equity. Weighted average for debt - 1.75%, plus weighted
average for equity - 9.00%, and will get weighted average cost of
capital
amounting to 10.75%.
17.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?
Submitted by:
8
Submitted to:
Prof. R. Queddeng
It would seem that the measures rank the projects identifically, all
points to
alternative two – own pub: Beach Karaoke Pub, with lower limit
investment of
1,700,000 baht. The best criterion would be to use either NPV or IRR
since both
considers time value of money.
Submitted by:
9
Submitted to:
Prof. R. Queddeng
Submitted by:
10
Submitted to:
Prof. R. Queddeng
Submitted by:
11
Submitted to:
Prof. R. Queddeng
Submitted by:
12
Submitted to:
Prof. R. Queddeng
Submitted by:
13
Submitted to:
Prof. R. Queddeng
18.Are the projects comparable based on the standard NPV measure,

given that
they have unequal lives? What adjustment or alternative method is
required
in comparing such projects?
The projects are comparable based on the standard NPV measure even
though
they have unequal lives. In NPV, cash flows are discounted into the
present
time.
All are put on "equal" footing, as if all the "inflows" would be
received today,
and as if all the
"outflows" would be spent today. Thus, the relevant time value of
money being
considered, evaluation is comparable. The only adjustment required
would
have to be in terms determining and evaluating the most effective cost
of
capital in decision-making.
Submitted by:
14
Submitted to:
Prof. R. Queddeng
Submitted by:
15
Submitted to:
Prof. R. Queddeng
19.How sensitive is your ranking to changes in the discount rate? What

other
“key value drivers” would affect the attractiveness of the
projects? Estimate
the sensitivity of your result to a change in any of the key value
drivers.
at 8%
Alternative 1 : Planet Karaoke Pub (Lower Limit)
NPV of
Year(s) Amount
0.926 299,792.50
2 300,650.00
0.857 257,657.05
3 313,162.50
0.794 248,651.03
4 251,300.00
0.735 184,705.50
1.000 (770,000.00)
220,806.08
Alternative 1: Planet Karaoke Pub (Upper Limit)
NPV of
Year(s) Amount
0.926 315,766.00
2 317,900.00
0.857 272,440.30
3 330,412.50
0.794 262,347.53
4 268,550.00
0.735 197,384.25
Renovation 0 1,000,000.00
1.000 (1,000,000.00)
47,938.08
Alternative 2 : Beach Karaoke Pub (Upper Limit)
Submitted by:
16
Submitted to:
Prof. R. Queddeng
NPV of
Year(s) Amount
Initial investment 0 1,200,000.00
1.000 (1,200,000.00)
Other capital investment 0 900,000.00
1.000 (900,000.00)
0.926 626,264.91
2 739,877.60
0.857 634,075.10
3 771,988.98
0.794 612,959.25
4 805,675.30
0.735 592,171.35
5 880,101.57
0.681 599,349.17
6 958,931.65
0.630 604,126.94
1,568,946.72
Alternative 2 : Beach Karaoke Pub (Lower Limit)
NPV of
Year(s) Amount
Initial investment 0 800,000.00
1.000 (800,000.00)
1.000 (900,000.00)
0.926 607,744.91
2 719,877.60
0.857 616,935.10
3 751,988.98
0.794 597,079.25
4 785,675.30
0.735 577,471.35
5 860,101.57
0.681 585,729.17
6 938,931.65
0.630 591,526.94
1,876,486.72
at 10%
NPV of
Year(s) Amount
0.909 294,288.75
2 300,650.00
0.826 248,336.90
3 313,162.50
0.752 235,498.20
4 251,300.00
0.683 171,637.90
0.621 (478,170.00)
471,591.75
NPV of
Year(s) Amount
0.909 309,969.00
2 317,900.00
0.826 262,585.40
3 330,412.50
0.752 248,470.20
4 268,550.00
0.683 183,419.65
1.000 (1,000,000.00)
4,444.25
Alternative 2: Beach Karaoke Pub (Upper Limit)
NPV of
Year(s) Amount
Submitted by:
17
Submitted to:
Prof. R. Queddeng

1.000 (1,200,000.00)
1.000 (900,000.00)
0.909 614,767.61
2 739,877.60
0.826 611,138.90
3 771,988.98
0.752 580,535.71
4 805,675.30
0.683 550,276.23
5 880,101.57
0.621 546,543.07
6 958,931.65
0.564 540,837.45
1,344,098.97
Alternative 2: Beach Karaoke Pub (Lower Limit)
NPV of
Year(s) Amount
1.000 (800,000.00)
1.000 (900,000.00)
0.909 596,587.61
2 719,877.60
0.826 594,618.90
3 751,988.98
0.752 565,495.71
4 785,675.30
0.683 536,616.23
5 860,101.57
0.621 534,123.07
6 938,931.65
0.564 529,557.45
1,656,998.97
at 14%
NPV of
Year(s) Amount
0.877 283,928.75
2 300,650.00
0.769 231,199.85
3 313,162.50
0.675 211,384.69
4 251,300.00
0.592 148,769.60
1.000 (770,000.00)
105,282.89
NPV of
Year(s) Amount
0.877 299,057.00
2 317,900.00
0.769 244,465.10
3 330,412.50
0.675 223,028.44
4 268,550.00
0.592 158,981.60
1.000 (1,000,000.00)
(74,467.86)
Alternative 2 : Beach Karaoke Pub (Upper Limit)
NPV of
Year(s) Amount
1.000 (1,200,000.00)
Submitted by:
18
Submitted to:
Prof. R. Queddeng

1.000 (900,000.00)
0.877 593,125.62
2 739,877.60
0.769 568,965.87
3 771,988.98
0.675 521,092.56
4 805,675.30
0.592 476,959.78
5 880,101.57
0.519 456,772.71
6 958,931.65
0.456 437,272.83
954,189.39
Alternative 2: Beach Karaoke Pub (Lower Limit)
NPV of
Year(s) Amount
1.000 (800,000.00)
1.000 (900,000.00)
0.877 575,585.62
2 719,877.60
0.769 553,585.87
3 751,988.98
0.675 507,592.56
4 785,675.30
0.592 465,119.78
5 860,101.57
0.519 446,392.71
6 938,931.65
0.456 428,152.83
1,276,429.39
at 16%
Alternative 1: Planet Karaoke Pub (Lower Limit)
NPV of
Year(s) Amount
0.862 279,072.50
2 300,650.00
0.743 223,382.95
3 313,162.50
0.641 200,737.16
4 251,300.00
0.552 138,717.60
1.000 (770,000.00)
71,910.21
NPV of
Year(s) Amount
0.862 293,942.00
2 317,900.00
0.743 236,199.70
3 330,412.50
0.641 211,794.41
4 268,550.00
0.552 148,239.60
1.000 (1,000,000.00)
(109,824.29)
Alternative 2: Beach Karaoke Pub (Upper Limit)
NPV of
Year(s) Amount
1.000 (1,200,000.00)
1.000 (900,000.00)
Submitted by:
19
Submitted to:
Prof. R. Queddeng

0.862 582,980.94
2 739,877.60
0.743 549,729.06
3 771,988.98
0.641 494,844.94
4 805,675.30
0.552 444,732.77
5 880,101.57
0.476 418,928.35
6 958,931.65
0.410 393,161.98
784,378.03
Alternative 2 : Beach Karaoke Pub (Lower Limit)
NPV of
Year(s) Amount
1.000 (800,000.00)
1.000 (900,000.00)
0.862 565,740.94
2 719,877.60
0.743 534,869.06
3 751,988.98
0.641 482,024.94
4 785,675.30
0.552 433,692.77
5 860,101.57
0.476 409,408.35
6 938,931.65
0.410 384,961.98
1,110,698.03
10.75% 8%
10% 14% 16%
Alternative 1 (Scenario One):
Planet Karaoke Pub (Upper 164,978.1 220,806.0
471,591.7 105,282.8 71,910.2
Limit) 0 8
5 9 1
Alternative 1 (Scenario Two):
Planet Karaoke Pub (Lower (11,219.1 47,938.0
(74,467.8 (109,824.2
Limit) 5) 8
4,444.25 6) 9)
Alternative 2 (Scenario One):
Beach Karaoke Pub (Upper 1,580,249.8 1,876,486.7
1,656,998.9 1,276,429.3 1,110,698.0
Limit) 4 2
7 9 3
Alternative 2 (Scenario Two):
Beach Karaoke Pub (Lower 1,265,469.8 1,568,946.7
1,344,098.9 954,189.3 784,378.0
Limit) 4 2
7 9 3
As the rate increases, the amount of discounted cash flows decreases.

The key
value driver would be the present value factor used and the length of
time for
the project to be finished. Since a dollar today is not worth a dollar
tomorrow,
the shorter the project is, the more attractive it would seem.
However, care
should be taken especially for projects involving unequal cash flows.
IV. Conclusion
Based on the computations done by the group given the current and projected
financial data of the two alternatives, the group recommends that Phuket Beach
Resort builds its own pub because of the figures that we derived from the
computations of IRR, ROI, Payback Period, and NPV.
Submitted by:
20
Submitted to:
Prof. R. Queddeng
Although it is financially attractive for Phuket Beach Resort to build and

operate its
own pub, there are also other factors that the management needs to look into
before
venturing into this business:
a. Current Financial Standing of the Resort:
 Are the owners financially capable of supporting such
venture?
b. Current Organizational Structure of the Resort:

 Is the current management set-up of Phuket Beach
Resort
prepared for the operation of a new outlet such as a
pub?
 Is the existing manpower line-up of the resort
skilled in
operating a pub?
c. Organizational Objective of the Resort:

 Did the owners of Phuket Beach Resort envisioned such
expansion?
d. Competitors
 How many competitors are there in the market?
 How are the financial muscles of the competitors?
 How is the market situation for pub?
 What is the foreseen growth of the industry?
e. Market Size
 Is the market big enough to welcome another competitor?
 What is the projected market growth in the next 5 years?
Submitted by:
21
Submitted to:
Prof. R. Queddeng
V. Recommendation
Annual returns for each investment alternative are related to the net
investment
to arrive at a certain rate which in turn are compared with the minimum
standard
established based on the lowest acceptable rate of return. Generally, the
investment rating procedures are classified into two categories: (1)
methods that
do not consider the time value of money; and (2) methods that consider the
time
value of money. Although not any one of these methods serves every
purpose,
nevertheless, the determination of the most appropriate method to be used
would
be dependent upon the circumstances and needs of a particular situation.
The existing capital budgeting system at Phuket Beach Hotel ranks projects
according to their average return on investment and payback period;
neglecting
the fact that both investment ranking alternatives do not consider time
value of
money. This does not present an accurate measurement of investment
profitability especially since a dollar today is worth more than a dollar
a year from
now. Recognition of time value of money is important in capital budgeting
decisions. Business investments commonly promise returns that extend over
fairly long periods of time and therefore it is necessary to employ
techniques that
recognize the time value of money.
The Payback Period is the length of time necessary to recover the entire
cost of
an investment from the resulting annual net cash flows. Payback period is
not a
true measure of the profitability of an investment. It simply tells the
manager
how many years will be required to recover the original investment. A
shorter
payback period does not always means that one investment is more desirable
than another. It has not inherent mechanism for highlighting differences
in useful
life between investments. Such differences can be very important, and
relying on
payback alone may result in incorrect decisions. It does not consider time
value
of money. Cash inflow to be received several years in the future is
weighted
equally with cash inflow to be received right now. Although it can be also
be very
useful under certain conditions since it can be used as a screening tool
and is
often of great importance to new firms that are “cash poor.”
Submitted by:
22
Submitted to:
Prof. R. Queddeng
The return on investment ranking of investment alternatives, on the other

hand, does not focus on cash flows. Return on investment (ROI) is the
average
annual net income from an investment expressed as a percentage of the
average
amount invested. The higher the rate of return in an investment the lower
the risk
of not recovering it. The concept of return on investment shares a common
weakness with payback period. It fails to consider that the present value
of an
investment depends on the timing of its future cash flows. Cash flows
receive in
the later life of an investment may be of less value today than cash flows
received
late in the life of an investment Net income figures are related to the
initial
investment of the project
Discounting future cash flows is a technique that does into account cash
flow
timing issues. The present value of the future cash flow is the amount
that a
knowledgeable investor would pay today for the right to receive that
future
amount. Arriving at a present value depends on - the amount of future cash
flows,
the length of time that the investor must wait to receive the cash flow,
and the
rate of return required by the investor. Discounting is the process by
which the
present value of cash flows (the discounted cash flows) is determined.
Submitted by:
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Submitted to:
Prof. R. Queddeng

Phuket Beach Hotel Final

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Phuket Beach Resort Case Analysis

Graduate School of Business

I. Statement of the Problem

II. Case Background

Mike Campbell, General Manager of Phuket Beach Hotel is considering an

Mike Campbell is contemplating on creating a pub operated by the

Mike Campbell sought the assistance of Kornkrit Manming, the hotel’s

a. come up with a concrete recommendation to the board of

b. determine if operating a pub in the hotel, whether by a

c. compute for the relevant cashflows associated with each

Graduate School of Business

d. identify the different criteria to be used in

e. assess the economic benefits associated with each of the

f. rank the projects using various

g. compare the two projects based on the standard NPV

4. Overhead expenses allocated to the Planet Karaoke Pub project

5. The weighted average cost of capital is 10.75% computed using 10%

9. The existing system ranked projects according to their average

10.Similar development proposals had been rejected by the board

Graduate School of Business

12.Both projects have the same repairs and maintenance costs.

13.The Chief Security Officer had expressed his concerns and

a. Alternative Courses of Action

14. Planet Karaoke Pub

Phuket Beach Hotel to rent out an unused space owned by the

15. Beach Karaoke Pub

Phuket Beach Hotel to create its own pub

Graduate School of Business

 Entails costs and investment

a. Analysis of the Case

16.Assess the economic benefits associated with each of the capital

The initial outlay for each alternative would depend on whether

Planet Karaoke Pub: 4 years

Graduate School of Business

Operating Cash Flow (Lower Limit) Year 1 Year 2

note: overhead expense, being an allocated cost, is not relevant.

Alternative 1 (scenario one): Planet Karaoke Pub (Lower Limit)

Graduate School of Business

Beach Karaoke Pub: 6 years

Net Income After Tax (Lower Limit)

Graduate School of Business

Alternative 2 (scenario one): Beach Karaoke Pub (lower limit)

Net Income After Tax (Upper Limit)

5,150,880.0 5,678,845.2 5,962,787.4

3,383,755.0 3,786,345.2 4,032,412.4

Graduate School of Business

Alternative 2 (scenario two): Beach Karaoke Pub (Upper Limit)

The appropriate discount rate to use for discounting the cashflows of

17.Rank the projects using various measures of investment

Graduate School of Business

Graduate School of Business

Graduate School of Business

Graduate School of Business

Graduate School of Business

Graduate School of Business

18.Are the projects comparable based on the standard NPV measure,

Graduate School of Business

Graduate School of Business

19.How sensitive is your ranking to changes in the discount rate? What

Alternative 2 : Beach Karaoke Pub (Upper Limit)

Graduate School of Business

Alternative 2: Beach Karaoke Pub (Upper Limit)