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Financial Management. EBS ML. 4th course students. Case study. Phuket Beach Hotel. Valuing Mutually Exclusive Capital Projects. Questions 1. Please asses the economic benefits associated with each of the capital project. What is Initial Outlay? What are the incremental cash flows over the life of the project? What is an appropriate discount rate to use for discounting the cash flows of the project? SN 1 and SN 2 - 40%

2. Are the project comparable based on the standard NPV measure, given that they have unequal lives? What adjustment or alternative method is required in comparing such project? - 10% SN 3

3. How sensitive is your ranking to changes in the discount rate? What other "key ...view middle of the document...

25 0.5 0.75 1 1 13200000 1650000 1 2040000 192500 10000 1650000 187500 56250 2 13464000 1683000 2 2040000 192500 10000 1683000 154500 46350 3 14137000 1767125 3 2142000 192500 10000 1767125 172375 51713 4 14844000 1855500 4 2249100 192500 10000 1855500 191100 57330

Project life Renovation cost Cost of capital (WACC) Increase in repairs and maintenance Patronage factor (Figure in bath except where otherwise stated) Year Net room revenue* Reduction in net room revenue Year Rental income Less: Depreciation expenses Increase in repairs & maintenance Reduction in net room revenue (a) Incremental operating income (b), ( c ) Less taxes (30%)

4 years 770000 baht 0.1075 10000 0.5

Decrease in net room revenue 25% 0% 6.25% 12.50% 18.75% 25.00%

0 0.125 0

Payback Period Discounted payback Net operating profit after taxes (NOPAT) 131250 108150 120662.5 133770 Average return on investment (ROI) Add: Depreciation 192500 192500 192500 192500 IRR Less Capital Expenditure 770000 192500 192500 192500 192500 MIRR 1 770000 Profitability index Free Cash Flow -770000 323750 300650 313163 326270 NPV PVIF (WACC %) 1 0.9029 0.8153 0.7362 0.6647 EAA Discounted free cash flow -770000 292325 245117 230536 216871 PVIFA =[(1+k)n - 1]/k Notes:1. Average return on investment (ROI) is calculated as the average of the NOPAT over the life of the project divided by average the upfront investment. 2. The Equivalent Annual Annuity is that level annual payment over the life of the investment that yields a present value just equal to the net present value of the entire cash flow stream. The annuity is determined by solving for "A": A= NPV/PVIFA n,k, where PVIFA =[(1+k) n - 1]/k n=number of periods k=discount rate. * Net room revenue = Room revenue - Room operating expenses (a) Consider externalities. Externalities represent the effect of a project on other parts of the firm. In this case, the possible reduction in room sales should be considered in the analysis for both project. (b) Identify the incremental cash flow. In evaluating the project in this case, we should focus on those cash flows that occur if and only if we accept project. These cash flows, called incremental cash flows, represent the changes in the firm's total cash flow that occurs as a direct result of accepting the project. ( c ) Ignore sunk cost: a sunk cost is an outlay that has already been committed or that has already occurred, hence is not affected by the decision under consideration. In this case, the overhead and salary expenses of the excess labor can be considered as sunk cost.

See SN 4 Sensitivity analyses: Cost of Capital PVIFA =[(1+k)n - 1]/k 8% PVIFA =[(1+k)n - 1]/k WACC% PVIFA =[(1+k)n - 1]/k 12 % PVIFA =[(1+k)n - 1]/k 14% PVIFA =[(1+k)n - 1]/k 16% PVIFA =[(1+k)n - 1]/k 18% PVIFA =[(1+k)n - 1]/k 20% PVIFA =[(1+k)n - 1]/k 22%

PVIFA 3.31210 3.11908 3.03730 2.91370 2.79820 2.69010 2.58870 2.49361

Rate 0.0800 0.1075 0.1200 0.1400 0.1600 0.1800 0.2000 0.2200

NPV 275944.11 214849.48...

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