Phuket Beach Hotel
To:Michael Campbell, General Manager, Phuket Beach Hotel From: Albert, Andy, Becca, Chris, & Derek Consulting Date:June 14, 2011 Re: Valuation of Potential Karaoke Pub Projects Thank you for retaining AaBCD Consulting in the valuation of your future capital improvement project. There are two mutually exclusive capital improvement projects under consideration: lease under-utilized space to an unrelated third party, Planet Karaoke Pub, or invest greater capital to open and manage your own nightclub, Beach Karaoke Pub.Using the predominant valuation methods, we have analyzed the relevant quantitative and qualitative data over their useful lives. In our assessment, we discuss the strengths and weaknesses of each approach as well as their relative weights in determining the financial viability of each project. There are three underlying assumptions driving our calculations: 1) a 10.
75% discount rate, 2) a 10% guest room erosion rate, and 3) the omission of irrelevant staffing costs (16% of sales) due to long-term salary contracts.We have determined that while both options are profitable, Beach is more so. However, before a final decision is made, more research into the qualitative aspects of these undertakings needs to be done; community footprint impacts and room revenue erosion rates must also be examined in more detail. Relevant Economic Benefits (1) In order to assess the viability of each project we must first determine the initial outlays and the relevant cash flows, assigning an appropriate discount rate based on the weighted average cost of capital.Taking the weight of equity (75%), the cost of equity (12%), the cost of debt (10%) and the corporate tax rate (30%), we have calculated and recommend a discount rate of 10. 75%, which is much higher than the initial 5% estimated by Mr. Manming.
Phuket Beach Hotel Essay Example
From the initial outlays of both projects, we see a benefit of choosing the third-party project, Planet Karaoke. The initial investment in renovation of (700,000 to 1 million baht), is much less than that for Beach Karaoke (1. 7 to 2. 1 million baht), due to the added equipment costs associated with running and managing the night club.