1A Case Study on Project Cash Flow and Capital Budgeting Coxs Bazar as the largest sea beach in the world earlier attracted thousands of tourists throughout the year. However, now-a-days this is not only a place for the tourists, but also a place for business delegates, cultural people, politicians, students and other classes of people. Gradually, the city is opening new windows for businesses and getting recognition as an important commercial hub in the South Asian region. There are a number of hotels and motels in the city of Coxs Bazar. However, the need still exists for more hotel services, in particular with the excellent service, and because of the large number of visitors to the region. Especially so that currently as business delegates usually want to avoid Dhaka city and prefer to meet in a sea beach-based city like Coxs Bazar. In the same way, local business houses also prefer this city for their annual conference, meetings, etc. Cultural houses and sports houses also have special preferences for this city. Last but not least, people from all over the country and all walks of life always favor Coxs Bazar city for their recreation. Mr. Rozario is the owner of a chain hotel named Paradise Bangladesh Ltd. and decides to establish one more five-star hotel in Coxs Bazar. The hotel will consist of 5 floors. The hotel will include 140 rooms and 2 suites, as well as a restaurant and a conference room on the ground floor. A detailed picture of the hotel accommodation and its estimated occupancy rate, including fare composition, is given in Table 1.

Table 1: Hotel accommodation, estimated occupancy rate, and fare

Types of Facility	Numbers	Occupancy Rate	Average Rent per room	Growth rate in Rent
Normal Room	140	30% or 110 days	TK. 8000	10%
Suite	2	30% or 110 days	TK. 25,000	7.5%
Conference room	1	40 days	TK 300,000	7.5%

The estimated cost of land is of TK. 180 million, and the construction cost is of TK. 450 million. The estimated salvage value at the end of twenty years will be 25% of the cost of construction. The cost of furniture is of TK. 200,000 for each room and TK. 500,000 for each suite. The cost of the furniture for the conference room is of TK. 3,000,000 and the restaurant is of Tk. 4,000,000. In addition, the cost is of TK. 52,500,000 for elevators and TK. 45,000,000 for air conditioning. The hotel will be built by the world renowned company named La Plata County Real Estate. The builder estimated that building will survive for 20 years. It results in annual consumption of the building at the rate of 5%. The required furniture will be supplied by the local reputed furniture company named Hatil Bangladesh Ltd. They ensured that furniture will go for 5 years very smoothly. This results in depreciation rate of 20 % per year. At the end of the fifth, tenth and fifteenth year, new furniture will be bought, and old furniture will be sold by the hotel owner. The owner of the hotel estimates that he would be able to purchase the required furniture at a 10% higher price than the previous purchase price. The salvage values of the furniture at the end of fifth, tenth, fifteenth and twentieth year will be 25% of their purchase prices with no book value reaming. Hotel Manager Salary is amounting to Tk. 150,000 a month, a total of TK.18, 00,000 in the year. Treasurer salary is of TK. 120,000 a month, TK. 1,440,000 each year. Receptionist Salary is of TK. 60,000 per month (number 4) TK. 2,880,000 each year. Salary per worker is of TK. 8000 per month (number 6) TK. 576,000 in the year. Water and electricity cost is of TK. 300,000 a month, Tk. 3,600,000 for the year and TK. 100,000 per month and Tk. 1, 200, 000 per annum is required for cleaning materials. All the above recurring expenses will increase at the rate of 5% per year. The rate of depreciation for elevators and air conditioning is 20%, which is commonly followed for the electronics goods in Bangladesh. As like as furniture, old elevators and air conditioners will be replaced by the new ones at the cost similar to the cost of the furniture. These instruments will have zero book value with salvage value of 25% of the respective assets purchase prices at the end of year five, ten, fifteen, and twentieth year. The hotel project will be entitled to enjoy tax holiday for the first five years after which the corporate tax rate of 37.5% will also be applied for the hotel. The estimated cost of capital by considering the structure of capital of the proposed hotel is fixed at 14%. 3The hotel authority is determined to provide the best and professional hotel services to the clients by offering training to the employees in home and abroad. They decided to spend Tk. 1,000,000 per year for the purpose of training of the employees.

Requirements: Please calculate the following for making decision about the financing.

1. Total estimated annual income.

2. Total estimated recurring expenses.

3. Estimated Profit per year.

4. Yearly depreciation for building, furniture, elevators and air conditioning.

5. Amount required for initial investment.

6. Cash inflow per year.

7. Pay Back Period

8. Net Present Value (NPV)

9. Internal Rate of Return (IRR)

10. Modified Internal Rate of Return (MIRR)

11. Sensitivity of the NPV if annual income, depreciation, recurring expenses, tax rate and project duration adversely affect the project due to 10% estimation error.