phuket
Phuket Beach Hotel Case Analysis
Phuket Beach Hotels (PBH) management has been approached by Planet Karaoke Pub (PKP) to lease a vacant space within the hotel. Management is intrigued by the offer because the space is currently not being used. Due to the recent success of karaoke pubs management is also considering creating a pub which they would call Beach Karaoke Pub (BKP). Finally, there is a possibility that the best option will be to seek an entirely different user type where the Karaoke Pub crowd may alienate 25% of the hotel patrons with young children.
This paper seeks to use capital budgeting analysis tools; net present value, internal rate of return, equivalent annual annuity and profitability index to definitively say which project has the best financial viability. The data used to generate the key decision metrics were provided by PBH management and are as follows.
Planet Karaoke Pub
-Four-year lease, monthly 170,000.00 baht for the first 2 years and 5% increase 2 additional years
-Upfront costs to PBH range between 770,000.00 baht and 1,000,000.00 baht with zero salvage
-Pro-rata allocation of the common area maintenance fee is 55,000 baht
-10,000.00 baht will be charged for common area maintenance fees
Beach Karaoke Pub
-Up-front investment will range between 800,000.00 baht and 1,200,000.00 baht
-Furniture, Fixtures and Equipment will cost 900,000.00 baht
-Estimated total sales in the first year are 4,672,000.00 baht (assuming 64 checks average 200.00 baht)
-Project life is six years with a sales growth of 6% per annum
-Zero salvage value for depreciation using the straight line method
-10,000.00 baht is charged for common area maintenance fees
PBH will use cash on hand for the capital improvements and so based on the interest rates on their deposits at Siam Commercial Bank the discount rate will be 10.75% to compensate for the additional risk of the investment.
Planet Karaoke
Phuket Beach Hotels (PBH) management has been approached by Planet Karaoke Pub (PKP) to lease a vacant space within the hotel. Management is intrigued by the offer because the space is currently not being used. Due to the recent success of karaoke pubs management is also considering creating a pub which they would call Beach Karaoke Pub (BKP). Finally, there is a possibility that the best option will be to seek an entirely different user type where the Karaoke Pub crowd may alienate 25% of the hotel patrons with young children.
This paper seeks to use capital budgeting analysis tools; net present value, internal rate of return, equivalent annual annuity and profitability index to definitively say which project has the best financial viability. The data used to generate the key decision metrics were provided by PBH management and are as follows.
Planet Karaoke Pub
-Four-year lease, monthly 170,000.00 baht for the first 2 years and 5% increase 2 additional years
-Upfront costs to PBH range between 770,000.00 baht and 1,000,000.00 baht with zero salvage
-Pro-rata allocation of the common area maintenance fee is 55,000 baht
-10,000.00 baht will be charged for common area maintenance fees
Beach Karaoke Pub
-Up-front investment will range between 800,000.00 baht and 1,200,000.00 baht
-Furniture, Fixtures and Equipment will cost 900,000.00 baht
-Estimated total sales in the first year are 4,672,000.00 baht (assuming 64 checks average 200.00 baht)
-Project life is six years with a sales growth of 6% per annum
-Zero salvage value for depreciation using the straight line method
-10,000.00 baht is charged for common area maintenance fees
PBH will use cash on hand for the capital improvements and so based on the interest rates on their deposits at Siam Commercial Bank the discount rate will be 10.75% to compensate for the additional risk of the investment.
Planet Karaoke