The main purpose of this assignment is to evaluate students understanding and ability to deal with a case study problem and to evaluating investment decisions using discounted cash flow methods. Moreover, it aims at testing students understanding of the traditional approaches to incorporate risk in investment decisions and applying knowledge and understanding of different models/methods and the underlying assumptions and their appropriate use in decision making.

Case study: Dream Hotel Group (DHG)-Capital Budgeting Decision

Mr. Faris, the owner of Dream Hotel Group (DHG), is evaluating a new hotel in Abu Dhabi. Mr. Faris has just finished his analysis of the new hotel. He has estimated that the hotel would be productive for eight years, after which a maintenance check and renovation need to be done to ensure the quality of the amenities that the hotels guests use. Mr. Faris has asked Ms. Sally, the hotels chief financial officer, to perform an analysis of the new hotel and present her recommendation on whether the DHG should open the new hotel. Ms. Sally has projected the expense of opening the hotel and the annual operating expenses. If DHG opens the hotel, it will cost AED 30 million today, and it will have a cash outflow of AED 5 million nine years from today in costs associated with renovations. The expected cash flows each year from the hotel are shown in the table below. Assume that DHG has a 13 percent required return on all of its hotels and it requires a payback period of 5 years.

Year Cash flow (AED)

0 (30,000,000)

1 2,000,000

2 4,000,000

3 5,000,000

4 8,000,000

5 9,000,000

6 9,000,000

7 3,000,000

8 2,000,000

9 (5,000,000)

Required:

1. Construct a spreadsheet to calculate the payback period, internal rate of return, profitability index and net present value of the proposed hotel. (55 marks)

2. Based on your analysis, should the DHG open the hotel? Explain. (20 marks)

3. Due to increase in the firms risk, the required return on DHG has increased to 20%. Explain how the increase in the risk and accordingly the increase in the required return will affect your decision to accept/reject the project. (25 marks)

Year	Cash flow
		0	-20,000,000
		1	2,000,000
		2	4,000,000
		3	5,000,000
		4	8,000,000
		5	9,000,000
		6	9,000,000
		7	3,000,000
		8	2,000,000
		9	-5,000,000
		Required return	13%
		Required Paybak	5

send the excel sheet by email

mammsh@hotmail.com