Do All the Measures Rank the Project Identically? Why and Why Not?
1
AGW610
LESSON 11
CASE 10: Phuket Beach Hotel: Valuing Mutually Exclusive Capital Projects
Mike Campbell, General Manager of Phuket Beach Hotel, paced his office and considered an offer made by Planet Karaoke Pub. Planet Karaoke Pub was expanding fast in Thailand. It was looking for a venue in the Patong beach area for setting up another outlet, and was eyeing an unused space owned by the Hotel. At this point, the space was located on the second floor of the main building and was very much underutilized. It was reserved for the construction of an alley linking to a new wing for the hotel, which would not be completed until two years later.
Planet Karaoke Pub offered to sign a four-year lease agreement with the hotel for renting part of the unused space. It proposed to pay:
• a monthly rental fee of 170,000 baht for the first two years; and
• thereafter, a 5 percent increment for the next two years.
In order to accommodate the hotel’s expansion plan, Planet Karaoke Pub required only 70 percent of the unused space, which had a size of 3,000 sq. feet. This would allow the hotel to keep the remaining space for the creation of an alley two years later.
It was envisaged that the proposed pub would not affect the hotel’s future expansion plan.
Nevertheless, Mike was still a bit perplexed about the decision facing him. Similar development proposals had previously been rejected by the board of directors. One of the old proposals, which involved converting the space into a cigar and champagne bar, had been rejected by the board because it required a long payback period. Another proposal for the creation of a spa was discarded due to its low return on investment. Given that the present capital budgeting system ranked projects according to payback period and average return on investment, Mike decided to seek careful analysis of the offer from the Pub1.
That evening, Mike asked to meet with Kornkrit Manming, the hotel’s Financial Controller, to
AGW610
LESSON 11
CASE 10: Phuket Beach Hotel: Valuing Mutually Exclusive Capital Projects
Mike Campbell, General Manager of Phuket Beach Hotel, paced his office and considered an offer made by Planet Karaoke Pub. Planet Karaoke Pub was expanding fast in Thailand. It was looking for a venue in the Patong beach area for setting up another outlet, and was eyeing an unused space owned by the Hotel. At this point, the space was located on the second floor of the main building and was very much underutilized. It was reserved for the construction of an alley linking to a new wing for the hotel, which would not be completed until two years later.
Planet Karaoke Pub offered to sign a four-year lease agreement with the hotel for renting part of the unused space. It proposed to pay:
• a monthly rental fee of 170,000 baht for the first two years; and
• thereafter, a 5 percent increment for the next two years.
In order to accommodate the hotel’s expansion plan, Planet Karaoke Pub required only 70 percent of the unused space, which had a size of 3,000 sq. feet. This would allow the hotel to keep the remaining space for the creation of an alley two years later.
It was envisaged that the proposed pub would not affect the hotel’s future expansion plan.
Nevertheless, Mike was still a bit perplexed about the decision facing him. Similar development proposals had previously been rejected by the board of directors. One of the old proposals, which involved converting the space into a cigar and champagne bar, had been rejected by the board because it required a long payback period. Another proposal for the creation of a spa was discarded due to its low return on investment. Given that the present capital budgeting system ranked projects according to payback period and average return on investment, Mike decided to seek careful analysis of the offer from the Pub1.
That evening, Mike asked to meet with Kornkrit Manming, the hotel’s Financial Controller, to