We will also test the sensitivity by changing the initial investment patronage

We will also test the sensitivity by changing the

This preview shows page 3 - 5 out of 6 pages.

We will also test the sensitivity by changing the initial investment, patronage loss rate and discount rate in question 5 to ensure a thorough analysis. I. Incremental cash flows In the first option, Phuket Beach Hotel will lease the free space to the Planet Karaoke Pub for 4 years. It will involve setting up partitions and a small kitchen, resulting in the up-front renovation costs between 770,000 Baht and 1,000,000 Baht. Straight-line depreciation as well as repair and maintenance costs are likely to be included the calculations of cash flows. Regardless the expenses, Phuket Beach Hotel will receive a monthly rental fee of 170,000 Baht for the first two years, and thereafter, a 5% increment for the next two years. Taking these adjustments and related assumptions, the incremental cash flows for leasing the place are: Page 3 of 6
Image of page 3
Corporate Finance In the second option, the Beach Karaoke Bar owned by the Hotel will be constructed. The up-front investments are much higher compared to the first option, including the cost of modern-style décor, ranging from 800,000 Baht and 1,200,000 Baht, as well as the capital investment on chairs, bar tables, kitchen set-up and karaoke equipment, which amount to 900,000 Baht. Therefore, the total amount initial capital expenditure would range between 1,700,000 Baht and 2,100,00 Baht. The project length will be 6 years, which is 2 years longer in comparison with the leasing option. The estimated total sales would be 4,672,000 Baht for the first year of operation, and a growth rate of 5% per annum. Straight line depreciation, annual capital expenditure which is equal to depreciation, as well as food, beverage costs and other operating costs will be taken into consideration when calculating the cash flows. Considering
Image of page 4
Image of page 5

You've reached the end of your free preview.

Want to read all 6 pages?

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

Stuck? We have tutors online 24/7 who can help you get unstuck.
A+ icon
Ask Expert Tutors You can ask You can ask You can ask (will expire )
Answers in as fast as 15 minutes