Valuing Mutually Exclusive Capital Projects

Phuket Beach Hotel: Valuing Mutually Exclusive Capital Projects

HOA 705-Financial Analysis for Service Industries

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Fall 2020

Optional Case for Extra Credit

Answer the following questions to shape your case write-up. Be as detailed as possible in your answers and make sure that you use evidence in the case to support your arguments. You can freely structure yourwrite-up in your own style as long as the case questions are properly addressed and a thorough discussion is provided. On the top-left corner of your case write-up, present the group number and the full name of the group members. Please note that one submission is adequate for each group and the write-up can be submitted by any one of the group members. Case write-up is due on December 6, Sunday 11.59pm. Write-ups need to be submitted in the folder provided on WebCampus.

Case Questions

Please assess the economic benefits associated with each capital project. What is the initial outlay? What are the incremental cashflows over the life of the project? What is an appropriate discount rate to use for discounting the cashflows of the projects?
Rank the projects using various measures of investment criteria (payback, discounted payback, average return on investment, IRR, PI and NPV). Do all the measures rank the projects identically? Why or why not? Which criterion is the best?
Are the projects comparable based on the standard NPV measure, given that they have unequal lives?Research and recommend what alternative methods can be used when projects have unequal lives. Why is the alternative method you recommend is better compared to NPV?
How sensitive is your ranking to changes in the discount rate?That’s how does accept/reject decision change as discount rate changes? Complete a quick sensitivity analysis by using discount rates that are around the appropriate discount rate you calculate (Pick three arbitrary discount rates; twohigher and one lower than the calculated discount rate).
Which project should the hotel undertake? Explain your reasoning.

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