Mike Campbell, General Manager of Phuket Beach Hotel, paced his office and considered an offer made by Planet Karaoke Pub. Planet Karaoke Pub was expanding fast in Thailand. It was looking for a venue in the Patong beach area for setting up another outlet, and was eyeing an unused space owned by the Hotel. At this point, the space was located on the second floor of the main building and was very much underutilised. It was reserved for the construction of an alley linking to a new wing for the hotel, which would not be completed until two years later.

Questions
1. Assess the economic benefits associated with each of the capital projects. 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?
2. Rank the projects using various measures of investment attractiveness. 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? Estimate the sensitivity of your result to a change in any of the key value drivers.
5. Which project should the hotel undertake?

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TABLE A Projection of Net Room Revenue (in Baht) (Room Sales - Room Operating Expenses) Year 5 6 Net room revenue 13,200,000 13,464,000 14,137,000 14,844,000 15,140,000 15,443,000