BBA6016 Capital Budgeting Project details

Course name: Corporate Finance

Course code: BBA6016 Assignment Type: Project Grade Weighting: 40% Hand-out date: 16.Sep.2024

Learning level: 6 Semester: 6 Grade Distribution: Individual and Group Hand-in date: 2 2.Dec .2024

Assignment Name: Capital Budgeting

Lecturer: Dang

Hand-in place and format: Turnitin (electronic copy) through Moodle, WORD and EXCEL

files

Assignment Overview

To evaluate a project’s feasibility by assessing its profitability through an analysis of its free cash flows and standard measures of return such as IRR and NPV.

Overall Aim

Students will determine the value of a hotel. Through an analysis of comparable properties, they will determine the costs of the different financing options, forecast the cash flows associated with the project, and estimate its profitability.

Intended Learning Outcomes

On successful completion of this project, you will be assessed for achievement of the following learning outcomes:

LO2 Evaluate various sources of debt and equity financing.
LO4 Calculate a project’s cost of capital, taking into account an assessment of risk.
LO5 Assess the profitability of a project.

AI Approach

For this project, you are permitted to use Generative AI tools such as ChatGPT.To maintain academic integrity, you must disclose any use of AI-generated material. As always, students must properly use attributions, including in-text citations, quotations and references.

Task, Organization and Grading

Assignment – Scenario

A few years after your graduation from Glion and some experience working in an upper midscale hotel chain, you are ready for the next stage in your career, namely purchasing a hotel in London, England.

You have found two hotels that are possibly for sale. The first one is a 300-room upscale hotel, the second one is a 250-room upper-upscale hotel.

You are planning on replacing both FFE and wall coverings as soon as the acquisition is completed. Details on renovation costs are provided in the assumptions below. Operations would start likely at the beginning of next year i.e January 2025.

Financing

You have been planning for this and have both saved money and guaranteed some equity investment from family. This will represent either 25% or 45% of the total cost (the % to be decided by you), including acquisition as well as renovation costs, with the remainder coming from debt.

Your task

For each of the hotel properties, you are required to:

Estimate the WACC.
Prepare Cash Flow for the next ten years.
Apply Discounted Payback, NPV, and IRR capital budgeting techniques to decide which property to acquire.

Assumptions:

Both hotels are operating at the average occupancy and ADR of similar hotels in the area. You hope to convince the current owners of each hotel to sell them for a price estimated using a room-rate multiplier:

Acquisition cost = current year’s ADR x Number of Rooms x 1000, where you would estimate the current year’s ADR using last year average, adjusted by inflation.

FFE renovation would cost 7% to 14% of the hotel acquisition cost (need to justify why your estimate is on the lower or higher range). You will have to show how the choice of spending less or more on FFE renovation will affect operations when making your forecasts.
The acquisition cost is to be depreciated straight-line over 40 years, but the additional FFE investment will be depreciated either straight-line over 10 years or using a 10-year double-declining depreciation method (you need to decide which method and explain your choice). It will have no salvage value.
In addition to the acquisition cost, you have to account for pre-opening costs which amount to about 0.5% of the acquisition cost.
For the Upscale hotel providing F&B, working capital is estimated as 3% of the following year’s estimated total revenue.
The F&B revenue will be a fixed percentage of Rooms revenue, taken from the results of similar hotels.
For the loans, you have been in contact with a few classmates who are now working in various banks. You were told to expect a 2.0% to 4.0% premium over the country’s 10year sovereign bond yields. That will depend on factors such as how much capital (in %) will be coming from equity, current economic conditions and future forecasts.
You will estimate the cost of equity using the CAPM, taking the betas of similar hotel chains as a starting point.
The Terminal Value (TV) after 10 years of operation will be estimated as follows, using a terminal capitalization rate for the area of 9.0%. Furthermore, you have to consider exit costs (brokerage commission and other fees) of 1.0% of terminal value

General guidelines:

Submit a 1500-word business report in Word and calculations in Excel.o The report should be written as a business report, succinct and direct to the point;
- There is no need to write an introduction, explaining what the project is about, or to explain the calculations done in Excel; you are required to explain/justify/source the assumptions used in the calculations and to analyze the results;
- Bullet points may be used, but you do have to cite the references used in APA style.

In trying to decide which hotel to acquire, you are required to consider both qualitative and quantitative factors.

Tasks, Organization and Grading:

Tasks	Percentage allocated to each task
Title Page Title – 10-12 words Names of all group members Course name Date
1. Introduction: Choice of scale, before calculations of IRR, NPV Using qualitative and some quantitative data of the market (trend reports, pipeline), choose between the two hotels	10%

Justifications for the choices made need to be clearly discussed: your justifications can be both qualitative (based on both peer-reviewed academic articles and trade journals) and quantitative discussion (based on the analysis of the provided STR and/or HOTstats data, and any relevant statistics, including CAGR, but before making any NPV/IRR calculations) Recommended word count: 200 words
2. Calculate each hotel’s cost of capital, WACC Explain your rationale for % of the total cost that you decided would be funded by equity. Should the estimated WACC vary for an Upscale or Midscale hotel? What other factors might cause the WACC estimate for each hotel to differ? Justify your answer. Recommended word count: 200 words	10%
3. Prepare the 10-year Cash Flow, terminal value, and calculate each hotel’s Discounted Payback Period, NPV, and IRR Key points you need to discuss are as follows: Upon estimating CF, you are required to discuss your basic assumptions on the following terms: How is the occupancy forecasted? How is the future ADR estimated? What are percentages, of departmental expenses, undistributed operating expenses, fixed charges, and tax? Upon discussing the results of Discounted Payback, NPV, and IRR, you need to discuss the following point: Among Discounted Payback, NPV, and IRR, which method is recommended? Justifications for the recommended method in this instance need to be clearly discussed. Recommended word count: 300 words	35%
4. Analyse the impacts of volatility and uncertainties in the forecasts on the WACC and forecasted FCF, as well as on NPV and IRR analysis Key points you need to discuss are as follows: Identify and analyse the various sources of risks involved in the project. What are some important assumptions in your forecasts about which you are less certain and could cause the forecasts of FCF and profitability to change significantly? Show in your calculations how some of these different assumptions would affect the forecasts and the final profitability measures, Assume that you decide to decrease the debt ratio of the riskier hotel by 15% and increase that of the less risky one by 15%. How might that affect the cost of debt and the cost of equity? How would that affect the WACC, NPV and IRR of each project? What does this tell you about each proposal’s sensitivity to the capital structure of the project? Assume that the estimated beta decreases by a multiple of 1.1 (i.e. it becomes 1.1 divided the beta you originally calculated) and that its cost of debt goes down by 1.0% (i.e., previous interest rate minus 1.0%). What is the new cost of capital for each of the hotels? What could cause the beta or the cost of debt to decrease? Are these	20%
possible scenarios in the actual economic context? Does your response to Question 3 change? Why or why not? What does this tell you about the proposal’ sensitivity to the cost of capital chosen? Recommended word count: 600 words
5. Conclusion Recapitulation and recommendation on which hotel to purchase, based on your forecasts and also on the uncertainty of your forecasts (shown in parts 4. and 5.) Recommended word count: 200 words	15%
6. References and presentation Your reference list should appear at the end of your paper. It provides the information necessary for a reader to locate and retrieve any source you cite in the body of the paper. Each source you cite in the paper must appear in your reference list; likewise, each entry in the reference list must be cited in your text. The report should be well-written, free of spelling and grammar mistakes.	10%

Group work

The project is assigned a grade by the instructor, but not all group members get the same grade. The grade is divided amongst group members by the members themselves.

Suppose the group with 8 members gets a grade of 60. You must divide 480 points (8 members x 60 points) amongst the 8 members and all members must agree with that breakdown. You have to submit by email, to me and to all member copied in the email, a file showing all members’ actual signatures.

Statement of authorship

To ensure proper academic research and report writing techniques, each individual or group written project work should include the following statement, signed by all students involved in the project.

I certify that I am the author (we are the authors) of this original, previously unpublished piece of work. I have clearly quoted, referenced and acknowledged any sources using current APA style referencing conventions. If indicated on the project outline that AI use is allowed, I have clearly acknowledged any AI generated or translated text using current APA style referencing conventions and I have included an appendix after my reference list detailing my inputs, the AI tool’s outputs, and a brief description of how I have used the AI generated text in my work.

I am aware that it is a breach of GIHE regulations to copy the work of another without clear acknowledgement and that attempting to do so renders me liable to disciplinary procedures. To this effect, I have uploaded my work onto Turnitin and have ensured that I have made any relevant corrections to my work prior to submission.

Final Documents

You are required to submit an electronic copy of your report to Turnitin BEFORE the hand in time, otherwise the work will not be accepted, and you will receive a zero or other penalty.
Only the submission of your work on Turnitin will be accepted. Work submitted by email directly to the Faculty member or academic team will not be accepted.
Word and Excel are the only formats accepted.
The final piece of work must be uploaded in enough time for the system to accept it on the due date. The system sometimes takes longer than normal to accept reports (from 30 min up to few hours).
Should you have difficulty using the system, you must contact your lecturer immediately

(leaving this until the last minute is unacceptable) and send the Word and Excel files by email. It is YOUR responsibility to upload your own work and last-minute IT issues will not be considered as mitigation.

You must not upload your work onto another person’s account. If this happens, your submission will not be assessed, leading to a zero. Only one person in the group should submit both Word and Excel files.
You are required to agree to the Turnitin usage policies when you first access the Turnitin website. Full information regarding the Turnitin service, including privacy, copyright and fair usage can be found on the Turnitin website at

http://www.turnitin.com/static/footnote/usagepolicy.html

Grading rubrics

	Clear fail (0-29%)	Fail (30% to 49%)	Threshold (50% to 59%)	Good (60% to 69%)	Very Good (70% to 89%)	Excellent (90% and above)
Introduction: clear, abundant and relevantqualitative and quantitative data, which is well used to justify the choice of scale. LO5 10%	Qualitative and quantitative data are missing, unclear, or irrelevant. The justification of choice is not wellreasoned and has little connection with the data presented.	Qualitative and quantitative data are insufficient and not always clear or relevant. The justification of choice is limited and mostly not based on qualitative and quantitative data presented.	Qualitative and quantitative data are somewhat clear, relevant but incomplete. The justification of choice is sufficiently wellreasoned, but not always based on qualitative and quantitative data presented.	Qualitative and quantitative data are clear, relevant and abundant. The justification of choice is mostly well-reasoned, based on the qualitative and quantitative data presented.	Qualitative and quantitative data are very clear, relevant and abundant. The justification of choice is very well-reasoned, based on the qualitative and quantitative data presented.	Qualitative and quantitative data are extremely clear, relevant and abundant. The justification of choice is exceptionally wellreasoned, based on the qualitative and quantitative data presented.
Cost of capital: correct calculation of WACC, with reasonable, well-justified and relevant assumptions on the different variables. LO4 10%	Calculation of WACC is mostly incorrect and the assumptions for the different variables mostly wrong, absent or not relevant.	Calculation of WACC presents several mistakes and the assumptions for the different variables often wrong, absent or not relevant.	Calculation of WACC presents quite a few mistakes and the assumptions for the different variables are sometimes wrong, not sufficiently justified or irrelevant.	Calculation of WACC is mostly correct but the assumptions for the different variables may at times be unclear or insufficiently justified or somewhat lack relevance.	Calculation of WACC is mostly correct and the assumptions for the different variables are mostly reasonable, well- justified and relevant.	Calculation of WACC is 100% correct and the assumptions for the different variables are reasonable, very well-justified and relevant.

CF forecast, calculation of profitability: Forecasts and calculations, with main assumptions justified.

Calculations and forecasts are absent or entirely incorrect. Justification for the assumptions in calculations is absent or incorrect.

Calculations and forecasts are mostly incorrect. Justification for the assumptions in calculations is mostly incorrect.

Calculations and forecasts have a few mistakes. Sometimes the justification for most important assumptions in calculations is unclear or incorrect.

Calculations and forecasts are mostly correct, but sometimes the justification for most important assumptions in calculations is unclear or incorrect.

Calculations and forecasts are mostly correct. Justification for most important assumptions in calculations is clear and rational.

Calculations and forecasts are flawless. Justification for all the important assumptions in calculations is clear and rational.

LO5 25%
Analysis of volatility and uncertainty in forecasts: critical analysis of the forecasting process and of how some assumptions may differ; recalculation of forecasts with those different assumptions LO4, LO5 30%	Analysis of risks and main variables that might differ from forecasts is poor or absent. Analysis and discussion are irrelevant or missing. Arguments are absent or entirely irrelevant. No logical reasoning or evidence from recalculations of WACC, CFs and profitability.	Analysis of risks and main variables that might differ from forecasts is minimal, and analysis is weak. Discussion is not well developed. Arguments are weak, poorly constructed, and lack logical reasoning or supporting evidence from recalculations of WACC, CFs and profitability.	Analysis of risks and main variables that might differ from forecasts is basic but adequate. Analysis and discussion are present but lack depth. Arguments are present but lack strength. Some logical reasoning and evidence from recalculations of WACC, CFs and profitability are provided, but need improvement.	Analysis of risks and main variables that might differ from forecasts is thorough. Analysis is clear and discussion is relevant. Arguments are clear, logical, and supported by relevant evidence from recalculations of WACC, CFs and profitability.	Analysis of risks and main variables that might differ from forecasts is comprehensive. Analysis is detailed and discussion is insightful. Arguments are strong, well- constructed, logical, and supported by robust evidence from recalculations of WACC, CFs and profitability.	Analysis of risks and main variables that might differ from forecasts is exceptionally comprehensive. Analysis is highly detailed, and discussion is insightful and comprehensive. Arguments are exceptionally strong, highly logical, and supported by comprehensive and compelling evidence from recalculations of WACC, CFs and profitability.
Conclusion: In written conclusion and appropriate recommendati ons. LO2, LO3, LO4, LO5 15%	Conclusion is absent or do not synthesize major findings from qualitative and quantitative analysis. Recommendation s are absent or irrelevant. No connection to data presented and calculations.	Conclusion is weak and poorly synthesize major findings from qualitative and quantitative analysis. Recommendation s are weak, poorly constructed, and lack connection to data presented and calculations.	Conclusion synthesizes some major findings from qualitative and quantitative analysis but lack depth or clarity. Recommendation s are present but lack clarity or full connection to data presented and calculations.	Conclusion effectively synthesizes major findings from qualitative and quantitative analysis with good clarity. Recommendation s are clear, relevant, and logically connected to the data presented and calculations.	Conclusion thoroughly synthesizes major findings from qualitative and quantitative analysis with high clarity and insight. Recommendation s are strong, highly relevant, and well- connected to the data presented and calculations.	Conclusion effectively synthesizes major findings from qualitative and quantitative analysis, providing clear, insightful, and comprehensive understanding. Recommendations are exceptionally strong, highly relevant, and thoroughly connected to the data presented and calculations.
TOTAL GRADE	0 to 29%	30% to 49%	50% to 59%	60 to 69%	70% to 89%	90% and above

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