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Case... Phuket Beach Hotel

Phuket Beach Hotel has unused space that Planet Karaoke Pub wants to lease to open a new outlet. The hotel considers two options: 1) Leasing the space to Planet for 4 years or 2) Opening their own karaoke pub called Beach Karaoke Pub. Financial analysis shows Beach Karaoke Pub has a higher NPV and IRR but more risk due to unconsidered staff salaries and security costs. Planet Karaoke Pub has lower returns but more financial certainty and less risk. Therefore, the recommendation is to choose the Planet Karaoke Pub project.

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Sanjay Kumar Jain
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864 views3 pages

Case... Phuket Beach Hotel

Phuket Beach Hotel has unused space that Planet Karaoke Pub wants to lease to open a new outlet. The hotel considers two options: 1) Leasing the space to Planet for 4 years or 2) Opening their own karaoke pub called Beach Karaoke Pub. Financial analysis shows Beach Karaoke Pub has a higher NPV and IRR but more risk due to unconsidered staff salaries and security costs. Planet Karaoke Pub has lower returns but more financial certainty and less risk. Therefore, the recommendation is to choose the Planet Karaoke Pub project.

Uploaded by

Sanjay Kumar Jain
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOC, PDF, TXT or read online on Scribd
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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 1,000,000.00 Patronage factor : Reduction in room rent revenue by 10%

Financial Performance
NPV IRR Payback period
Average Cashflows Average Return on investments Discount Rate

598,705 38% Two Years 519412.5 52% 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 2100,000.00 Patronage factor : Reduction in room rent revenue by 10%

Financial Performance
NPV IRR Payback period
Average Cashflows Average Return on investments Discount Rate

2,22 7,225 42% Two year 1,05 6,980 50%


11.5%

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 Revenue Patronage factor) Staff Salary Beach Karaoke Pub Expected Risky Planet Karaoke Pub Fixed Less risky Favorable investment Planet Planet

factor

Impact (Room rent 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 Practices) Phuket Beach Hotel report Book Financial management (Theory &

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