Phuket Beach Analysis Essay
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Statement of the Problem Should the management of Phuket Beach Resort accept the offer made by PlanetKaraoke Pub to set up an outlet inside the hotel or should the managementoperate a pub, Beach Karaoke Pub, by itself? II. Case Background Mike Campbell, General Manager of Phuket Beach Hotel is considering an offermade by Planet Karaoke Pub, a fast expanding company, which is looking for avenue in Patong beach area for setting up another outlet.
The Board of Directorsof the establishment had previously rejected several old offers because it offerslow return on investment.
The space was located on the second floor of the main building and was verymuch under-utilised. Planat Karaoke Pub offered to sign a four-year leaseagreement with the hotel for rending part of the unused space. It proposed topay:a. a monthly rental fee of 170,000 baht for the first two years; andb. thereafter, a 5% increment for the next two years. Planet Karaoke Pub required only 70% of the unused space measuring 3,000 sq.
This would allow the hotel to keep the remaining space for the creation of analley two years later. Mike Campbell is contemplating on creating a pub operated by the managementof the hotel itself since such establishments attract a lot of customers andtourists. Mike Campbell sought the assistance of Kornkrit Manming, the hotel’s FinancialController to review the offer from Planet Karaoke Pub and estimating revenuesand costs associated with an alternative project, Beach Karaoke Pub. III. Objectives With the given two alternatives on hand, this case aims to:a. ome up with a concrete recommendation to the board of directorsof Phuket Beach Resort of which of the two alternatives will offer a higherreturn on investmentb. determine if operating a pub in the hotel, whether by a third party orby management, will be a good investment on the part of the hotel. c. compute for the relevant cashflows associated with each projects?
The 25% fear factor is applied on the projected annual net room revenuerepresenting 50% of the pub revenue – 50% from hotel guests. . Overhead expenses allocated to the Planet Karaoke Pub project amountingto 55,000 baht and 16% of sales representing salaries for the Beach KaraokePub project are considered irrelevant costs since these costs will not differbetween alternatives. Both are allocated costs. 5. The weighted average cost of capital is 10. 75% computed using 10%interest rate and 12% hotel owners’ cost of equity on its capital structureconsisting of 25% debt and 75% equity respectively. The cost of equity isassumed to be after tax. 6. All payments and inflows assumed to have been made at the end of theyear.
The two projects have unequal lives: Planet Karaoke Pub to run for 4 yearswhile Beach Karaoke Pub to run for 6 years. 8. It was envisaged that the proposed pub would not affect the hotel’s futureexpansion plans. 9. The existing system ranked projects according to their average return oninvestment and payback period, regardless to the time value of money. 10. Similar development proposals had been rejected by the board because itrequired a long payback period. Other proposals were also discarded due toits low return on investment.