Busan Resort Hotel: Valuing an Independent Capital Project

Busan Resort Hotel: Valuing an Independent Capital Project Harris Ford, General Manager of Busan Resort Hotel, paced his office and considered to expand the business by opening a karaoke pub and will name it Beach Karaoke Pub. The project will require an up-front investment of US$750,000. This represents the cost of a modern-style dcor. Other capital investment, including chairs, bar tables, kitchen set-up and karaoke equipment, will cost US$100,000. Michael expects revenue to be generated 50% from walk-ins and 50% from hotel guests. Total sales are estimated to be US$740,950 for the first year of operation. Michael arrives at this figure by assuming an average of 70 covers per day with an average check of US$29. With a seating capacity of 35, the pub has to turn tables at least twice a day. Operating hours of the pub will be from 5:00 p.m. to midnight. The projected length of the project is six years and sales are expected to grow at 5% annually. Michael's estimates for operating costs are as follows: Food and beverage costs 25% of sales Salaries (16% of sales Other operating expenses 22% of sales Equipment & furniture depreciated equally over the life Depreciation: Jof the project using the straight-line method, with zero salvage value at the end Annual capital expenditure Equaled depreciation (Same with depreciation cost) Michael estimates that salary expenses will account for 16% of sales. Staff can be recruited internally because the hotel has excess manpower at this point. The excess staffs has long-term contracts with the hotel and are kept in order to meet the demands of the growing business. Repairs and maintenance costs will account for 2% of sales. The interest rate or required rate of return is 12% and the corporate tax rate in Busan is 30% Busan Resort Hotel: Valuing an Independent Capital Project Harris Ford, General Manager of Busan Resort Hotel, paced his office and considered to expand the business by opening a karaoke pub and will name it Beach Karaoke Pub. The project will require an up-front investment of US$750,000. This represents the cost of a modern-style dcor. Other capital investment, including chairs, bar tables, kitchen set-up and karaoke equipment, will cost US$100,000. Michael expects revenue to be generated 50% from walk-ins and 50% from hotel guests. Total sales are estimated to be US$740,950 for the first year of operation. Michael arrives at this figure by assuming an average of 70 covers per day with an average check of US$29. With a seating capacity of 35, the pub has to turn tables at least twice a day. Operating hours of the pub will be from 5:00 p.m. to midnight. The projected length of the project is six years and sales are expected to grow at 5% annually. Michael's estimates for operating costs are as follows: Food and beverage costs 25% of sales Salaries (16% of sales Other operating expenses 22% of sales Equipment & furniture depreciated equally over the life Depreciation: Jof the project using the straight-line method, with zero salvage value at the end Annual capital expenditure Equaled depreciation (Same with depreciation cost) Michael estimates that salary expenses will account for 16% of sales. Staff can be recruited internally because the hotel has excess manpower at this point. The excess staffs has long-term contracts with the hotel and are kept in order to meet the demands of the growing business. Repairs and maintenance costs will account for 2% of sales. The interest rate or required rate of return is 12% and the corporate tax rate in Busan is 30%