Introduction: The report is about the case study on project cash flow and capital budgeting on the

projection of opening a hotel in Cox’s Bazar named as Paradise Bangladesh Ltd. Mr. Rozario, the owner
of the hotel has the plan to establish this five star hotel in Cox’s Bazar which will have 5 floors consisting
of 140 rooms, 2 suits, a restaurant and a conference cum a small wedding hall on the ground floor. Rent of
the rooms which is classified as normal room and suit is 8000 Tk and 25000 Tk. accordingly. The growth
rate of the room rents is accordingly 10% and 7.5% annually which are projected to be occupied 110 days.
The rent of the conference cum wedding hall is BDT 300000 which is projected to be occupied 40 days
yearly and will have a growth rate of 7.5%.

The estimated land cost of the hotel is 180 million and construct cost is 450 million. And the estimated
salvage value at the end of 20 years is 25% at the cost of construction. Cost of furniture is Tk. 200,000 and
Tk. 500,000 for each suite. Cost of furniture for conference cum wedding hall us Tk. 3,000,000 and
restaurant is of Tk 4,000,000. Additionally, cost is Tk. 52,500,000 for elevators and Tk. 45,000,000 for air
conditioning.

Hotel manager’s salary have been fixed 150,000 a month and treasurer salary are of Tk. 120,000 each
month. It will have 4 receptionist whose salary is 60,0000 per month and will have 6 worker whose salary
is 8000 per month. Water and electricity have a monthly expenditure of 300,000 Tk. And the cleaning
materials will cost 1,200,000.00 per annual year. Moreover, the above-mentioned hotel project will enjoy
a tax holiday which is 37.5 % for the first 5 years. And lastly, there is a training and development cost each
year for Tk. 1,000,000.

As per the requirement of the case we need to calculate the total national income, estimated recurring
expenses, estimated profit year, yearly depreciation for building, furniture, elevators and air conditioning,
amount required for initial investment, cash inflow per year, pay back period, NPV (net present value),
Internal rate of return (IRR), Modified Internal Rate of Return (MIRR) and lastly sensitivity of NPV if
annual income, depreciation, recurring expenses, tax rate and project duration adversely affect the project
due to 10% estimation error for making the decision about financing on the project
Calculation:

1) Total estimated annual income:

For Year 1 to Year 20, the computation is as follows:

Normal Room = 140 (number of rooms) * 110 days (occupancy rate) * 8000tk (average rent) with a growth
rate of 1.1 each year following

Suite = 2(number of rooms) * 110 days (occupancy rate) * 25000tk (average rent) with a growth rate of
1.075 each year accordingly

Conference cum Wedding hall = 1(number of rooms) * 40days (occupancy rate) * 300000tk (average rent)
with a growth rate of 1.075 each year following

For example at Year 1:

Total estimated annual income=

Normal Room 123,200,000.00

Suite 5,500,000.00
Conference cum Wedding Hall 12,000,000.00
Total Revenue 140,700,000.00

2) Total estimated recurring expenses:

For Year 1 to Year 20, the computation is as follows:

Manager Salary = 150000tk * 12 months and increasing at a rate of 5% each year following

Treasurer Salary = 120000tk * 12 months and increasing at a rate of 5% each year following

Receptionist Salary = 60000tk * 4(number of receptionists) *12 months and increasing at a rate of 5% each
year following

Workers Salary = 8000tk * 6(number of workers) * 12 months and increasing at a rate of 5% each year
following

Water & Electricity Expense = 300000tk * 12 months and increasing at a rate of 5% each year following

Cleaning expense = 100000tk * 12 months and increasing at a rate of 5% each year following

Training expenses = 1000000tk per year

Therefore, for example for Year 1:

Total estimated recurring expenses

Manager salary 1,800,000.00

Treasurer Salary 1,440,000.00
Receptionist salary 2,880,000.00
Workers Salary 576,000.00
Water & Electricity Expense 3,600,000.00
Cleaning expense 1,200,000.00
Training expenses 1,000,000.00
Total Recurring Expenses (Excl Dep) 12,496,000.00

3) Estimated profit per year:

Earnings before tax (EBT) – Tax (at a rate of 37.5% each year excluding the first 5 years due to tax holiday)
= EPS or Estimated profit per year

Therefore, for example for Year 7:

Estimated profit:

EBT/PBT 176,988,352.41
Tax 66,370,632.16
EAT 110,617,720.26

4) Yearly depreciation for building, furniture, elevators and air conditioning:

Depreciation (at a rate of 20% each year and an additional 1.1 growth rate each 5 years following)

Building Depreciation = 450000000*0.05(annual consumption rate of 5%

Furniture Depreciation = 140(number of rooms) *200000

Suite Depreciation = 2(number of suites) *500000

Conference room cum wedding hall Depreciation = 3000000

Restaurant Depreciation = 4000000

Elevators Depreciation = 52500000

Air conditioning Depreciation = 45000000

Therefore, for example for Year 13:

Depreciation =

450000000*0.05+(140*200000+2*500000+3000000+4000000+52500000+45000000) *1.1*1.1*0.2 =
54,807,000.00

5) Amount required for initial investment: It is the total amount that is required to start a business. Below
is the total initial investment for the projected hotel:

Land cost 180 million

Construction cost 450 million

Furniture cost 140(number of rooms) *200000
Suite cost 2(number of suites) *500000
Conference room cum wedding hall cost 3000000
Restaurant cost 4000000
Elevators cost 52500000
Air conditioning cost 45000000
Total initial investment 763.50 million

6) Cash inflow per year: It is the next cashflow of the company that remains after all the depreciation and
tax addition or subsidization.

Below is the formula to find out the cash inflow per year:

Cash flow before capital expenditure + capital expenditure + net salvage value = net cash flow per year

Cash flow before capital expenditure = Earnings after tax + Depreciation (changing each 5 years due to
growth rate of 1.1 each 5 years)

For example, for Year 6, Cash flow before capital expenditure = 97,497,632.73 + 51,870,000.00 =
149,367,632.73tk
Capital expenditure is computed at the end of year 5,10,15,20 for furniture, suite, conference room cum
wedding hall, restaurant, elevators, and air conditioning with a growth rate of 1.1 at end of 5 years. For year
20, it will be 0tk

For example, for Year 5, Capital expenditure

= - (200000*140*1.1+500000*2*1.1+3000000*1.1+4000000*1.1+52500000*1.1+45000000*1.1) = -
146850000tk

Net salvage value is computed at the end of year 5,10,15,20 for furniture, suite, conference room cum
wedding hall, restaurant, elevators, and air conditioning at 25% salvage value cost deducted from 25% of
purchase prices and corporate tax of 37.5% with zero book value

For example, for Year 5, net salvage value

= (140*200000+2*500000+3000000+4000000+52500000+45000000) *0.25-(33375000*0.375) =
20,859,375.00tk

Therefore, for Year 5, for example

Net Cash flow = 188,774,370.11 + (146,850,000.00) + 20,859,375.00 = 62,783,745.11tk

7) Pay Back Period: Payback period in capital budgeting refers to the period of time required to recoup
the funds expended in an investment, or to reach the break-even point.

Pay Back Period = (Initial Investment – Opening Cumulative Cash Flow) / (Closing Cumulative Cash Flow
– Opening Cumulative Cash Flow)

Initial Investment = 763,500,000.00

Opening Cumulative Cash Flow = 128,204,000.00

Closing Cumulative Cash Flow = 4,883,117,628.11

The computation is as follows:

Pay Back Period = 5+ (763,500,000.00 - 128,204,000.00) / (4,883,117,628.11- 128,204,000.00)

Pay Back Period = 5.13

The payback period for this project is 5.13 years.

8) Net Present Value (NPV): Net present value (NPV) is the difference between the present value of cash
inflows and the present value of cash outflows over a period of time.

In the given case, Initial Investment = 763500000.00

Discount Rate = 14.00%

Net Present Value = F / [ (1 + i) ^n] – initial investment

Where,

F = Future payment (cash flow)

i = Discount rate (or interest rate)

n = the number of periods in the future the cash flow is

For Year 1 to Year 20, the computation is as follows:

Net Present Value= 128,204,000.00/ (1+0.14) ^1+ 141,261,700.00/ (1+0.14) ^2+155,621,097.50/ (1+0.14)
^3+171,411,338.31 / (1+0.14) ^4

+62,783,745.11/ (1+0.14) ^5+149,367,632.73/ (1+0.14) ^6+162,487,720.26/ (1+0.14) ^7

+176,913,300.13/ (1+0.14) ^8+192,773,859.72/ (1+0.14) ^9+63,017,547.16/ (1+0.14) ^10

+230,484,719.25/ (1+0.14) ^11+251,562,045.75/ (1+0.14) ^12+274,734,096.67/ (1+0.14) ^13

+300,208,637.36/ (1+0.14) ^14+166,300,447.45/ (1+0.14) ^15+360,212,868.62/ (1+0.14) ^16

+394,058,028.66/ (1+0.14) ^17+431,264,367.34/ (1+0.14) ^18+472,165,318.67/ (1+0.14) ^19

+598,285,157.42/ (1+0.14) ^20-763500000.00

= 406,316,331.53tk

The Net Present Value is 406,316,331.53tk

9) Internal Rate of Return (IRR): The internal rate of return (IRR) is a metric used in capital budgeting to
estimate the profitability of potential investments. The internal rate of return is a discount rate that makes
the net present value (NPV) of all cash flows from a particular project equal to zero. IRR calculations rely
on the same formula as NPV does.
Here, Initial Investment = 763500000.00

The IRR formula is 0 = CF of year 0 + CF of year 1/ (1+IRR) +CF of year 2/ (1+IRR) ^2 +CF of year
n/(1+IRR) ^n

CF of year 0 = initial investment

n = each period

For Year 1 to Year 20, the computation is as follows:

Internal Rate of Return 0 = -763500000.00+128,204,000.00/ (1+IRR) ^1+ 141,261,700.00/ (1+IRR)

^2+155,621,097.50/ (1+IRR) ^3+171,411,338.31 / (1+IRR) ^4

+62,783,745.11/ (1+IRR) ^5+149,367,632.73/ (1+IRR) ^6+162,487,720.26/ (1+IRR) ^7

+176,913,300.13/ (1+IRR) ^8+192,773,859.72/ (1+IRR) ^9+63,017,547.16/ (1+IRR) ^10

+230,484,719.25/ (1+IRR) ^11+251,562,045.75/ (1+IRR) ^12+274,734,096.67/ (1+IRR) ^13

+300,208,637.36/ (1+IRR) ^14+166,300,447.45/ (1+IRR) ^15+360,212,868.62/ (1+IRR) ^16

+394,058,028.66/ (1+IRR) ^17+431,264,367.34/ (1+IRR) ^18+472,165,318.67/ (1+IRR) ^19

+598,285,157.42/ (1+IRR) ^20

= 20.602%

The Internal Rate of Return is 20.602% by using the above-mentioned equation.

10) Modified Internal Rate of Return (MIRR): The modified internal rate of return (MIRR) is a financial
measure of an investment's attractiveness. It is used in capital budgeting to rank alternative investments of
equal size. As the name implies, MIRR is a modification of the internal rate of return (IRR) and as such
aims to resolve some problems with the IRR.

In the given case,

MIRR= ((NPV /Total investment) ^ (1/Building Life Years) – 1)

= ((406,316,331.53 /763500000.00) ^ (1/20) -1)

= 93.33%
11) Sensitivity of the NPV if annual income, depreciation, recurring expenses, tax rate and project
duration adversely affect the project due to 10% estimation error.

We have done sensitivity analysis of NPV in such way which have adversely affected the project due to
10% estimation error on annual income, depreciation, recurring expenses and taxes.

Below are answers of NPV after doing sensitivity analysis:

10% estimation error on annual income: NPV = 274,961,446.39

10 % estimation error on depreciation: NPV = 412,734,611.04

10 % estimation error on recurring expense increase: NPV =397,716,664.97

10 % estimation error on project duration which has result on 18 years projection where NPV=
406,316,331.53.

To sum up, from above calculation and discussion we can come to a point that as the NPV value’s are
positive the project should accepted to work on.