A Case Study on Capital Budgeting

Dr. Prashanta K. Banerjee, Md. Ruhul Amin, Faculty Member, BIBM

Cox's Bazar as the largest sea beach in the world earlier attracted thousands of tourists throughout the year. However, now-a-days this is not only a place for the tourists, but also a place for business delegates, cultural people, politicians, students and other classes of people. Gradually, the city is opening new windows for businesses and getting recognition as an important commercial hub in the South Asian region. There are a number of hotels and motels in the city of Cox's Bazar. However, the need still exists for more hotel services, in particular with the excellent service and because of the large number of visitors to the region. Especially so that currently as business delegates usually want to avoid Dhaka city and prefer to meet in a sea beach based city like Cox's Bazar. In the same way local business houses also prefer this city for their annual conference, meetings, etc. Cultural houses and sports houses also have special preference for this city. Last but not the least people from all over the country and all walks of life always favor Cox's Bazar city for their recreation. Mr. Rozario is the owner of a chain hotel named Paradise Bangladesh Ltd. and he decides to establish one more five star hotel in Cox's Bazar. His group has approached your bank for loan financing and submitted details relating to his upcoming project. The hotel will consist of 5 floors. The hotel will include 140 rooms and 2 suites, as well as a restaurant and a conference room cum a small wedding hall on the ground floor. A detailed picture of the hotel accommodation and its estimated occupancy rate including fare composition is given in the table: Types of Facility Numbers Occupancy Rate Normal Room 140 30% of 110 Days Suite 2 30% of 110 Days Conference Cum Wedding Hall 1 40 Days Average Rent Per Room TK. 5000 TK. 12,000 TK. 200,000

The estimated cost of land is of TK. 70.35 million and the construction cost is of TK. 180.375 million. The cost of furniture is of TK. 200, 000 for each room and TK. 400,000 for each suite. The cost of the furniture for the conference room cum wedding hall is of TK. 3,000,000 and restaurant is of Tk. 4,000,000. In addition, the cost is of TK. 22,500,000 for elevators and TK. 1,000,000 for air conditioning. The hotel will be built by the world renowned company named 'La Plata County Real Estate'. The builder estimated that building will survive for 20 years. It results in annual consumption of the building is at the rate of 5%. The required furniture will be supplied by the local reputed furniture company named Hatil Bangladesh Ltd. They ensured that furniture will go for 5 years very smoothly. This results in depreciation rate 20% per year. Hotel Manager Salary is amounting to Tk. 150,000 a month, a total of TK. 1,800,000 in the year. Treasurer salary is of TK. 120,000 a month, TK. 1,440,000 each year. Receptionist Salary is of TK. 60,000 per month (number 4) TK. 2,880,000 each year. Salary per worker is of TK. 8,000 per month (number 6) TK. 576,000 in the year. Water and electricity cost is of TK. 300,000 a month, Tk. 3,600,000 for the year and TK. 100,000 per month and Tk. 1,200,000 per annum is required for cleaning materials. The rate of depreciation for elevators and air conditioning is 20%, which is commonly followed for the electronics goods in Bangladesh. The current corporate tax rate of 37.5 % will also applied for the hotel. The estimated cost of capital by considering the structure of capital of the proposed hotel is fixed at 14%. The hotel authority is determined to provide the best and professional hotel services to the clients by offering training to the employees in home and abroad. They decided to spend Tk. 1,000,000 per year for the purpose of training of the employees. Calculate the following for making decision about the financing. 1. Total estimated annual income. 2. Total estimated recurring expenses. 3. Estimated Profit per year. 4. Yearly depreciation for building, furniture, elevators and air conditioning. 5. Variable expenses and fixed expenses. 6. Amount required for initial investment. 7. Cash inflow per year. 8. Pay Back Period 9. Net Present Value (NPV) 10. Internal Rate of Return (IRR) 11. Modified Internal Rate of Return (MIRR)