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.

Michaels estimates for operating costs are as follows:

Food and beverage costs

25% of sales

Salaries

16% of sales

Other operating expenses

22% of sales

Depreciation:

Equipment & furniture depreciated equally over the life of 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%

3. Introduction

4. Purpose of the study/project

5. Case study overview

6. Calculation of the project

a) Net Investment (NINV)

b) Net Cash Flows (NCFs)

c) Payback Period (PP)

d) Net Preent Value (NPV)

e) Internal rate of return (IRR)

7. Analysis

8. Decision

9. Conclusion

10. References

11. Appendix