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Case II Assignment

Phuket Beach Hotel


Prof. Q. Ma, HADM 7230 Corporate Finance
SHA, Cornell University

Suppose Mike Campbell also hired you as an external consult to help him decide what to do
with the projects. Yes, Wanidas got seven strong competitors. Prepare a report that covers the
questions shown below. Keep in mind that Mike does not know much about finance but he is
intuitive. So please also explain the techniques you use and the intuition behind them, whenever
appropriate.

1. Please assess the economic benefits associated with each of the capital projects. What is the
initial outlay? What are the incremental cash flows over the life of the project? What is an
appropriate discount rate to use for discounting the cash flows of the projects? The formula
for discount rate is the weighted average cost of capital:
R = W
E
* R
E
+ (1 W
E
) * R
D
(1 T
c
), where,
W
E
: weight of equity
R
E
: cost of equity
R
D
: cost of debt
T
c
: corporate tax rate.
2. Rank the projects using various measures of investment attractiveness. The criteria to
consider include: payback, discounted payback, average return on investment, IRR,
profitability index, and NPV. Do all the measures rank the projects identically? Why or why
not? Which criterion is the best?
3. Are the projects comparable based on the standard NPV measure, given that they have
unequal lives? What adjustment or alternative method is required in comparing such
projects?
4. How sensitive is your ranking to changes in the discount rate? What other key value
drivers would affect the attractiveness of the projects? Please estimate the sensitivity of
your result to a change in any of the key value drivers.
5. Which project should the hotel undertake?

Presentation
When making a presentation, imagine that the general manager and the board of directors sit in
your audience, who make the final decision on the projects based on your (and Wanidas) analyses
and proposals. Your job is to convince them that you (and your group as a whole) are capable and
indeed better than Wanida in this matter.

Submission
Prepare slides for discussing these matters.
Develop Excel spreadsheet (programmed instead of hard coded).
A summary of fewer than five pages with usual specification (12 font size; double space; 1
margin, etc.), appendices attached to the end of the summary file.
The due date/time is 5pm Monday June 13, 2011.
The case is open-ended and time-consuming. Please start as early as possible.