Phuket Beach Botel

Valuing Mutually Exclusive Capital Projects

Working Notes
1.) Weighted Average Cost of Capital (WACC)
WACC = We x Ke + Wd x Kd (1-t)
We = Proportion of Debt in Total Financing = 25%
Wd = Proportion of Equity in Total Financing = 75%
Ke = Cost of Equity = 12%
Kd = cost of Debt = 10%
t = Tax Rate = 30%
WACC = 0.75 x 0.12 + 0.25 x 0.10 (1 - 0.30) = 10.75%
2.) For Planet Karaoke Pub
a. Rental Income : Baht 170,000pm for 12 mts for first two years, and increase by 5% for nest 2 years
b. Straight line Depriciation
c. Patronage factor taken as 25% of the 50% guest who would not come to the karaoke pub
d. Taxes @ 30%
e. Base Capital Cost : Baht 770,000
f. WACC : 10.75%
3.) For Beach Karaoke Pub
a. Sales (64 covers/day @ 200 bahts/cover over 365 days) Growth Rate @ 5%
b. Food & Beverage cost @ 25% of sales
c. Other Operational Expenses @ 22% of sales
d. Salaries not considered as already sunk cost
e. Straight line Depriciation
f. Patronage factor taken as 25% of the 50% guest who would not come to the karaoke pub
g. Taxes @ 30%
h. Base Capital Cost : Baht 1700,000
i. WACC : 10.75%

12 mts for first two years, and increase by 5% for nest 2 years

50% guest who would not come to the karaoke pub

50% guest who would not come to the karaoke pub

Analysis of Cash Flow - Planet Karaoke Pub (figures in Baht)

Details
Yr. 0
Retail Income
less Depriciation
less Increase in Repair & Maintenance charges
less Decrease in Room Revenue
Additional Operating Income
less Taxes
NOPAT
add Depriciation
less Capital Expenditure
###
Operating Cash Flow
###
Discounted Operating Cash Flow @ 10.75%
###
Payback Period : 2.46 yrs
Discounted Payback Period : 3.01 yrs
Average Return on Investment : 39%
NPV : 165,017 Baht
PI : 1.21
IRR : 21%
Equivalent Annuity : 52,906 Baht

Yr. 1
Yr. 2
Yr. 3
Yr. 4
###
###
###
###
###
###
###
###
(10,000) (10,000) (10,000) (10,000)
###
###
###
###
187,500 154,500 172,375
84,000
(56,250) (46,350) (51,713) (25,200)
131,250 108,150 120,663
58,800
192,500 192,500 192,500 192,500
323,750 300,650 313,163 251,300
292,325 245,117 230,536 167,039

Analysis of Cash Flow - Beach Karaoke Pub (figures in Baht)

Details

Yr. 1
Sales
###
less Food & Beverage Cost
###
less Other Operating Expenses
###
less Depriciation
###
less Increase in Repair & Maintenance charges
(10,000)
less Decrease in Room Revenue
###
Additional Operating Income
532,827
less Taxes
###
NOPAT
372,979
add Depriciation
283,333
less Capital Expenditure
###
###
Operating Cash Flow
### 372,979
Discounted Operating Cash Flow @ 10.75%
### 336,775
Payback Period : 3.84 yrs
Discounted Payback Period : 4.95 yrs
Average Return on Investment : 30%
NPV : 373,043 Baht
PI : 1.22
IRR : 17%
Equivalent Annuity : 87,545 Baht

Yr. 0

Yr. 2
###
###
###
###
(10,000)
###
623,635
###
436,544
283,333
###
436,544
355,911

Yr. 3
###
###
###
###
(10,000)
###
669,508
###
468,656
283,333
###
468,656
345,003

Yr. 4
###
###
###
###
(10,000)
###
717,631
###
502,342
283,333
###
502,342
333,906

low - Beach Karaoke Pub (figures in Baht)

Yr. 5
###
###
###
###
(10,000)
###
823,955
###
576,768
283,333
###
576,768
346,165

Yr. 6
###
###
###
###
(10,000)
###
936,569
###
655,598
283,333
###
655,598
355,284

Sensitivity Analysis - One Factor (figures in Bahts)

Patronage Factor
Planet Karaoke Beach Karaoke
Pub
Pub
Patronage
Decision
Equivalent
Equivalent
Annuity
Annuity
0
1,263,950
1,332,436 Build
0.25
658,428
709,990 Build
0.5
52,906
87,545 Build
0.75
(552,616)
(534,901) Reject Both
1
(1,158,138)
(1,157,347) Reject Both
Upfront Investment
Planet Karaoke Beach Karaoke
Pub
Pub
% Increase
Decision
Equivalent
Equivalent
Annuity
Annuity
0%
52,906
87,545 Build
5%
43,450
57,680 Build
10%
33,994
27,816 Lease
20%
15,082
(31,912) Lease
30%
(3,830)
(91,641) Reject Both
Cost of Capital
Planet Karaoke Beach Karaoke
Pub
Pub
Decision
Equivalent
Equivalent
Annuity
Annuity
8%
66,676
122,557 Build
10.75%
52,906
87,545 Build
12%
46,536
71,332 Build
14%
36,207
45,022 Build
16%
25,712
18,274 Lease
18%
15,057
(8,889) Lease
20%
4,247
(36,449) Lease
22%
(6,712)
(64,385) Reject Both
Cost of
Capital

Sensitivity Analysis - Two Factor : Cost of Capital & Patronage

The Build (Beach Karaoke Pub) Option - Equivalent Annuity (figures in Bahts)
Cost of
8%
10.75%
12%
1,370,536 1,332,436 1,314,853
746,546
709,990
693,092
122,557
87,545
71,332
(501,433) (534,901) (550,428)
###
###
###

Patronage
0
0.25
0.5
0.75
1

Capital
14%
16%
18%
1,286,391 1,257,545 1,228,335
663,706
637,910
609,723
45,022
18,274
(8,889)
(575,663) (601,361) (627,501)
###
###
###

The Lease (Planet Karaoke Pub) Option - Equivalent Annuity (figures in Bahts)
Cost of Capital
8%
10.75%
12%
14%
16%
18%
1,279,229 1,263,950 1,256,911 1,245,531 1,234,001 1,222,356
672,952
658,428
651,724
640,869
629,862
618,706
66,676
52,906
46,536
36,207
25,712
15,057
(539,601) (552,616) (558,651) (568,455) (578,437) (588,592)
###
###
###
###
###
###

Patronage
0
0.25
0.5
0.75
1

Difference in Equivalent Annuity : Build - Lease (figures in Bahts)

Patronage
0
0.25
0.5
0.75
1

8%
91,307
73,594
55,881
38,168
20,455

10.75%
64,486
51,562
34,639
17,715
791

Cost of Capital
12%
14%
57,942
40,860
41,368
24,837
24,796
8,815
8,223
(7,208)
(8,351)
(23,231)

16%
23,534
8,048
(7,438)
(22,924)
(38,409)

18%
5,979
(8,983)
(23,946)
(38,909)
(53,873)

Decision : Build V/s Lease

Cost of Capital
8%
10.75%
12%
14%
16%
18%
0
(Build )
(Build )
(Build )
(Build )
(Build )
(Build )
0.25
(Build )
(Build )
(Build )
(Build )
(Build )
(Lease )
0.5
(Build )
(Build )
(Build )
(Build )
(Lease )
(Lease )
0.75 (Reject Both(Reject
)
Both(Reject
)
Both(Reject
)
Both(Reject
)
Both(Reject
)
Both )
1
(Reject Both(Reject
)
Both(Reject
)
Both(Reject
)
Both(Reject
)
Both(Reject
)
Both )

Patronage