project appraisal_hotel project in sri lanka

8/3/2019 Project Appraisal_hotel Project in Sri Lanka

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INTRODUCTION

.

According to Sri Lanka Tourist Board statistics the employment generation is

over 150,000 and with the current arrival trend this is expected to shoot up to

600,000 by 2016. With the average tourist arrivals which is around 425,000 to

bring in a revenue around US $450 million. Therefore, we will have many

opportunities in Sri Lankan hotel sector in future.

This hotel project is related to Trincomalee and there are many advantages can

gain to investors due to rapid development of Sri Lankan Economy. Therefore this

will be a great opportunity to investing there.



2

ADVANTAGES OF BUILDING A HOTEL IN TRINCO

y Cost of labour is low

y Cost of food item is low ±e.g fish

y Geographical locations

y Competitive advantage due to minimum hotels



4

GENER ATING THE R ELEVANT CASH FLOW STATEMENTS FOR

10 YEAR S

Generating Cash In-Flow

R oom R ates

R oom rates are taken as compare to the Nilavali Beach hotel. The rates are takenas average figures of the room charges. The half-board and Full-board methodwas negligee by the writer and room rates are taken as Stranded and Deluxe.

The following table is shown the used techniques to generate the cash flow for first five years.

Table 1

Calculation the Revenue for first 5 years

Stranded A/C room

Single Double Triple

Rooms 30 60 40

Room Rates 8000 11000 16000

Occupancy Rate 65 65 65

Revenue per day 156000 312000 208000

Revenue per year 56940000 113880000 75920000

Revenue for 5 years 284700000 569400000 379600000

Total Revenue for first 5years 1,233,700,000

Studio Deluxe Rooms

single Double Triple

Rooms 20 35 15

Room Rates 18000 20000 23000


Revenue per day 234000 195000 523250

Revenue per year 85410000 71175000 190986250


Total Revenue for first 5years 1,737,856,250



5

Stranded A/C

room

Studio Deluxe

Room

Total Revenue

Revenue for first 5 years 1233700000 1737856250 2971556250Revenue for 1 year 246740000 347571250 594311250

According to the following table you can identify how we generate room rates for

next five years

Table 2

Calculation the Revenue for Next 5 years

Stranded A/C room

Single Double Triple

Rooms 30 60 40

Room Rates 10000 13750 19200


Revenue per day 156000 312000 208000

Revenue per year 56940000 113880000 75920000

Revenue for next 5 years 284700000 569400000 379600000

Total Revenue for first 5years

1233700000

Studio Deluxe Rooms

single Double Triple

Rooms 20 35 15

Room Rates 22500 25000 28750


Revenue per day 292500 243750 654062.5

Revenue per year 106762500 88968750 238732813


Total Revenue for first 5years

2172320313

Stranded A/Croom

Studio DeluxeRoom

Total Revenue

Revenue for first 5 years 1233700000 2172320313 3406020313

Revenue for 1 year 246740000 434464063 681204063



6

-

To generate the room charges for second five years, main assumption was room

charges are increased by 25% per year. The following table is shown the room

charges of Nilavali Beach hotel. When I generate the revenue the following

figures are considered in average way.

Table 3

(http://www.tangerinehotels.com/index.php?option=com_content&view=article&id=79& Itemid=94)

Occupancy R ates

The occupancy rate is taken as 65% around the 10 years time period. The occupancy rate

in North East is 70% in Sri Lanka. (Key Statistical Indicator Sri Lankan Tourism 2010).

Here we are generating a forecasted cash flow. Therefore, I have considered the

occupancy rate as 65% because it can be vary from year to year. But there is a great

possibility to increase the rate during next ten years.

Generating Cash Out-Flows

Mainly four types of costs are considered for the project including;

y Administration cost

y Salaries and wages

y Sales promotions

y Maintenance cost

Then the Administration cost was taken as 60% of the cost of sales because when

we compare the administration cost of reputed hotels in Sri Lanka Like Tangerine

Hotels PLC it was closed to 50% to 65% of them. Therefore, the writer has taken

Standard A/C Rooms Studio Deluxe Rooms

Single Double Triple Single Double Triple

Half Board 7,750 10,500 14,750 Half Board 11,750 14,500 18,750

Full Board 9,000 13,000 18,500 Full Board 13,000 17,000 22,500



7

60% for administration cost of total expenses. Cost like, food & beverage,

electricity, telephone etc are included in to administration cost.

Salary and wages were taken as 25% of total expenses because many reputed

hotel in Sri Lanka like tangerine hotel PLC the maintenance cost was closed to

20% to 30%. To generate the cash flows for ten years this assumption was used by

me.

Maintenance cost was taken as 9% of the cost of sales because when compare to

Sri Lankan reputed hotels it was close to 8% to 10% like Tangerine Hotel PLC.

Therefore, maintenance cost was considered as 9% of total cost.

Sales & promotion cost was taken as 6% of the cost of sales because when

compare to Sri Lankan reputed hotels it was close to 5% to 08% like Tangerine

Hotel PLC. Therefore, maintenance cost was considered as 6% of total cost.

Table 4

Calculation Expenses (out flow) for 10 years

Y ear Admini st rat ion

Cost

Salaries &

Wages

Sales &

Promot ion

Maint enance

Cost

Tot al

Expenses

1 142634700 59431125 21395205 14263470 237724500

2 156898170 65374238 23534726 15689817 261496950

3 172587987 71911661 25888198 17258799 287646645

4 189846786 79102827 28477018 18984679 316411310

5 208831464 87013110 31324720 20883146 348052440

6 229714611 104415732 34457192 22971461 391558996

7 252686072 125298879 37902911 25268607 441156468

8 277954679 150358654 41693202 27795468 497802003

9 305750147 180430385 45862522 30575015 562618069 10 336325162 216516462 50448774 33632516 636922914



8

Main assumption on calculation expenses

Table 5

The above table is shown you the assumptions which I have used to generate the

expenses related to the forecasted cash flows. By going through the annual reports

of Sri Lankan reputed hotels like Tangerine Hotels Plc , Continental Hotel Plc

these assumption was generated by me.

Calculation of Expenses

Average revenue 594311250

Total expenses are considered as 40% of revenue 237724500

Administration is considered as 60% of the Expenses 142634700

Salary is considered as 25% of the Expenses 59431125

Sales is considered as 09% of the Expenses 21395205

Maintenance is considered as 06% of the Expenses 14263470



9

PROJECTED CASH FLOWS FOR 10 YEAR S TIME PERIOD

P rofit before interest and tax

Table 6

Cash Flows for 10 years time period

Year INFLOW OUTFLOW PBIT

Revenue Administration

cost

Salaries &

wages

Sales &

promotions

Maintenance

cost

1594,311,250 142,634,700 59,431,125 21,395,205 14,263,470 356,586,750

2594,311,250 156,898,170 65,374,238 21,395,205 14,263,470 336,380,168

3 594,311,250 172,587,987 71,911,661 21,395,205 14,263,470 314,152,927

4 594,311,250 189,846,786 79,102,827 21,395,205 14,263,470 289,702,962

5 594,311,250 208,831,464 87,013,110 21,395,205 14,263,470 262,808,001

6 681,204,063 229,714,611 104,415,732 24,523,346 16,348,898 306,201,476

7

681,204,063 252,686,072 125,298,879 24,523,346 16,348,898 262,346,868

8 681,204,063 277,954,679 150,358,654 24,523,346 16,348,898 212,018,486

9 681,204,063 305,750,147 180,430,385 24,523,346 16,348,898 154,151,287

10 681,204,063 336,325,162 216,516,462 24,523,346 16,348,898 87,490,195

The above table is shown us the behaviour of profit before interest and tax. After

that we must deduct the interest and tax expenses. Then following table is shown

the profit after interest and tax.



10

Profit after interest and tax

Table 7

Interest and Tax Expenses

Year PBIT Interest Profit after

Interest

Income Tax

Expense

15%

TDL 1% Net Profit

1 356,586,750 44,000,000 312,586,750 46,888,013 5,943,113259,755,625

2 336,380,168 44,000,000 292,380,168 43,857,025 5,943,113242,580,030

3 314,152,927 44,000,000 270,152,92740,522,939 5,943,113

223,686,875

4 289,702,962 44,000,000 245,702,962 36,855,444 5,943,113202,904,405

5 262,808,001 44,000,000 218,808,001 32,821,200 5,943,113180,043,688

6 306,201,476 44,000,000 262,201,476 39,330,221 6,812,041216,059,214

7 262,346,868 44,000,000 218,346,868 32,752,030 6,812,041178,782,798

8 212,018,486 44,000,000 168,018,486 25,202,773 6,812,041136,003,672

9 154,151,287 44,000,000 110,151,287

16,522,693 6,812,04186,816,553

10 87,490,195 44,000,000 43,490,195 6,523,529 6,812,04130,154,625

The tourism development levy was considered as 1% per year. The Income tax

expenses are considered as 15% per year. (www.sltda.lk/cost)

The above table is given you a clear picture of generating the net profit after

interest and tax. Interest rate is considered as 12% per year (Central Bank R eport

2010). Following Table is shown how I calculated the interest.



11

Table 8

Bank Interest Rate Calculation

Bank Loan Amount 200000000

Bank Interest per year 200000000 x 0.12 24000000

Bank Interest for 10 year 24000000 x 10 240000000

Total amount to pay 200000000+216000000 440000000

Therefore, Interest per month 416000000/10 44000000

GP R atio and NP R atio Analysis

Year PBIT Net Profit Revenue GP Ratio NP Ratio

1 356586750 259755625 594,311,250 0.60 0.44

2 336380167.5 242,580,030 594,311,250 0.57 0.41

3 314152926.8 223,686,875 594,311,250 0.53 0.38

4 289702961.9 202,904,405 594,311,250 0.49 0.34

5 262808000.6 180,043,688 594,311,250 0.44 0.30

6 306201475.9 216,059,214 681,204,063 0.45 0.32

7 262346868.4 178,782,798 681,204,063 0.39 0.26

8 212018485.5 136,003,672 681,204,063 0.31 0.20

9 154151286.8 86,816,553 681,204,063 0.23 0.13

10 87490195.07 30,154,625 681,204,063 0.13 0.04



12

NPV ANALYSIS

y The following table shown is NPV analysis of the particular project. According to

net income the investment can recover from less than 3 years.

y But we can not say yet. Because of the time value matter. Therefore, we mustcalculate the time value of money.

y Therefore, after calculating the time value of money we can recover of investmentafter 4 years and 10 months time.

Year net cash

inflow

Discount rate @

15%

NPV Cumulative cash

flow

1 259755625 0.870 225,874,457 225,874,457

2 242580030 0.756 183,425,353 409,299,810

3 223686875 0.658 147,077,751 556,377,561

4 202904405 0.572 116,011,252 672,388,814

5 180043688 0.497 89,513,533 761,902,347

6 216059214 0.432 93,408,361 855,310,707

7 178782798 0.376 67,211,076 922,521,783

8 136003672 0.327 44,459,842 966,981,624

9 86816553 0.284 24,678,683 991,660,307

10 30154625 0.247 7,453,762 999,114,069

999,114,069



14

R ECOMMENDATIONS

y When you go through with the forecasted profits of the cash flow you will see

there is a decreasing manner. It was due to my assumption on occupancy rates and

other cost factors.y I have assumed the occupancy rate as 65% around the 10 years time period.

Practically it won¶t be like that. Next decade of Sri Lankan Tourism the

occupancy rate may be increased to 90%. There are many reasons for that.

Therefore, we have another 35% to increase. If we can do it we will have more

and more profits.

y When we consider the expenses side we should always try to reduce the

Administration cost and other waist. I have assumed administration cost will

increase 10% per year. But if we can reduce it 1% per year it will be a help to

increased the profit.

y Then we talk about the room rates it was the main factor to increase the revenue.

My assumption was room rates incensement was 25% after 5 years time. Most of

time after ten years time it can be increased by 50% compare to today¶s charge of

a room. So we can increase the profit definitely.

y Any way this hotel project is a very worth will project to you to generate more

profit. Therefore, by investing on it you can earn more and more profit in future.



15

REFERENCES

y Glautier,M. W. E and B. Underdown Accounting Theory and practice

(2002); Harllow: Financial times Prentice hall; 2nd edition

y

www.sltda.lk/costy http://www.tangerinehotels.com/index.php?option=com_content&view=article

&id=79&Itemid=94

y Tangerine Hotels PLC (2010)

y Central Bank report (2010)

y Key Statistical Indicator Sri Lankan Tourism (2010)

project appraisal_hotel project in sri lanka

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