Phuket Beach Hotel has a chance to rent its underused plot to a karaoke pub and generate an income through the lease. Otherwise, the hotel could build the empty space and develop a self-owned pub. The general manager of the hotel needs to determine which of the two options to propose to the owners ofthe hotel. This case gives enough data to chalk out the cash flow predictions for each project and to prioritize the separate projects with the useof different evaluation techniques and benchmarks.
Beach Karaoke Pub
Planet Karaoke Pub
Upper Limit Sensitivity
Lower Limit Sensitivity
Cost of debt
Cost of Equity
1. Please assess the economic benefits and costs associated with each of the capital projects. What are relevant incremental cash flows for the build and lease options? (For the calculation of incremental cash flows, create two spreadsheets – one for build option and the other for the lease option).
2. What is the appropriate discount rate for discounting the incremental cash flows?
3. Calculate and rank the projects according to payback, internal rate of return, net present value, profitability index, and equivalent annual annuity.
4. How sensitive is your ranking to changes in the discount rate? Create a net present value profile graph with NPV on the vertical axis and cost of capital on the horizontal axis.
5. Which project should the hotel undertake?