Financial Feasibility Analysis & the case study of JW Marriott 5-star Hotel Project = Phân tích khả thi tài chính áp dụng cho dự án khách sạn 5 sao JW Marriott

VIETNAM NATIONAL UNIVERSITY, HANOI SCHOOL OF BUSINESS Dang Thi Thu Huong FINANCIAL FEASIBILITY ANALYSIS & THE CASE STUDY OF JW MARRIOTT 5-STAR HOTEL PROJECT Major: Business Administ

VIETNAM NATIONAL UNIVERSITY, HANOI

SCHOOL OF BUSINESS

Dang Thi Thu Huong

FINANCIAL FEASIBILITY ANALYSIS

&

THE CASE STUDY OF JW MARRIOTT 5-STAR HOTEL PROJECT

Major: Business Administration

Code: 60 34 05

MASTER OF BUSINESS ADMINISTRATION THESIS

Supervisor: PhD Tran Phuong Lan

Ha Noi, 2012

TABLE OF CONTENT

ACKNOWLEDGEMENTS i

ABSTRACT ii

TÓM TẮT iv

TABLE OF CONTENT vi

LIST OF FIGURES ix

LIST OF TABLE x

1.1 Research objectives 2

1.2 Research questions 2

1.3 Data resources 2

1.4 Thesis structure 3

1.5 Thesis’s limitation 4

CHAPTER 1: LITERATURE REVIEW 6

1.1 Overview of construction projects 6

1.1.1 Concept of project 6

1.1.2 Project life cycle 6

1.1.3 Project’s aspects 9

1.2 Features of Hospitality industry 10

1.3 Overview of Feasibility Study 11

1.3.1 Concept of a Feasibility Study 11

1.3.2 Importance of a Feasibility Study 12

1.3.3 Contents of a Feasibility Study 12

1.4 Environment Feasibility Analysis Models 13

1.4.1 PEST model 14

1.4.2 Five forces model 15

1.5 Financial Feasibility Analysis 19

1.5.1 Concept of Financial Feasibility Analysis 19

1.5.2 Purposes of Financial Feasibility Analysis 19

1.5.3 Conducting a Financial Feasibility Analysis 20

1.5.4 Criteria for a Financial Feasibility Analysis 21

1.5.5 Risk analysis methods 28

CHAPTER 2: OVERVIEW AND FINANCIAL FEASIBILITY ANALYSIS OF JW MARRIOTT HOTEL PROJECT 30

2.1 Overview of Project Investor 30

2.2 Overview of JW Marriott Hotel Project 32

2.3 Project’s Environment Feasibility Analysis 39

2.3.1 PEST Analysis 39

2.3.2 Five force Analysis 42

2.4 Project’s Costs 44

2.4.1 Construction cost 44

2.4.2 Annual Operation Costs 45

2.4.3 Other expenses 48

2.5 Project’s Revenues 48

2.5.1 Room revenue 49

2.5.2 Conference, Food and Beverage revenue 53

2.5.3 Revenue from renting luxury store 53

2.5.4 Revenue from other services 54

2.6 Capital budgeting 54

2.7 Estimated Financial Statement 58

2.7.1 Estimated Project’s Income Statement 58

2.7.2 Estimated Project’s Cash flow 64

2.8 Financial Criterion Calculation 65

2.9 Summary and conclusion of project investment efficiency 65

CHAPTER3: RESEARCH FINDINGS AND RECOMMENDATIONS 66

3.1 Limitations in JW Marriott Hotel Project model 66

3.2 Recommendation to construct an effective Financial Feasibility Analysis for a hotel project 73

CONCLUSION 85

REFERENCES 87

APPENDICES 88

LIST OF FIGURES

Figure 1.1: PEST Model 15 Figure 1.2: Forces Driving Industry Competition 16 Figure 2.1: Real GDP Growth Rate & GDP per Capita in Viet nam & Hanoi 40

LIST OF TABLE

Table 2.1: Project scale 35

Table 2.2: Number of conference room 36

Table 2.3: Competitors of JW Marriott hotel 43

Table 2.4: Construction cost of JM Marriott hotel 45

Table 2.5: Room price of other 5 star hotels in Hanoi 49

Table 2.6: Forecasted room price for JW Marriott hotel 50

Table2.7: The average occupancy rate of 5 star Hotels in Hanoi in 3 recent years 2008, 2009 and 2010 52

Table 2.8: Finance structure 56

Table 2.9: Project’s operation costs and revenues 58

Table 3.1: Number of room of 5-star hotel in Hanoi 67

Table 3.2: Npv sensitivity to the changes in standard room rate and suite room rate 70

INTRODUCTION

As competition in the business environment increases, knowledge management becomes a critical success factor Firms should be able to gather, analyze and re-use knowledge to support their strategic and management decisions Construction firms also should analyze information in hand, includes completed and on-going project data, and make it a part of their learning mechanism Project evaluation is an organizational learning mechanism aiming to form data for the last objectives are monitoring and making decision Particularly, information about efficiency, feasibility and the risks with their consequences is an important piece of knowledge that the firms should refer to in the forthcoming projects in order not to

do the same mistakes

Feasibility Study is an important tool that your organization can use to demonstrate its accountability, improve its performance, increase its abilities for obtaining funds or future planning, and fulfill the organizational objectives By communicating the results of the feasibility study, your organization can inform its staff, board of directors, service users, funders, the public, or other stakeholders about the benefits and effectiveness of your organization’s projects and programs Although there are many benefits in conducting Feasibility Study, it will be a waste

of your organization’s resources if the results are not used

With these above reason, the major objective of this thesis is to develop a model for feasibility study, especially on the view of finance discipline The framework is modeled to ensure information continuity throughout the project life cycle This model is discussed through analyzing a real project, since then, get study from that and makes recommendation

1.1 Research objectives

The objective of this study is to develop a manual that presents a step-by-step process for determining the effectiveness of a hotel project The techniques that will be used in the methodology are common financial analysis tools

A case study of project in BITEXCO – JW Marriott Hotel project will be used to demonstrate evaluation process; therefore, will primarily consist of an overview of the factors that should be addressed in each project, particularly those factors that will serve as the base for assumptions made during the feasibility study Based on the existing method applied in JW Marriott hotel, this thesis also gives some recommendations to conduct an effective Financial Feasibility Analysis for a real estate for rent project

In summary, the primary objective of this study is to develop a complete methodology that can be used to evaluate feasibility of a project, focus on finance aspect and especially for a hotel project

secondary data is existent data that is studied and where the researcher has not been

involved in its collection (Bell and Bryman 2007)

The data can be of quantitative or qualitative nature This thesis will make use of qualitative and quantitative, empirical, secondary data such as the before mentioned reports, feasibility studies as well as books and a broad range of articles concerning the several topics of: feasibility study, project appraisal, project evaluation, project risk analysis Secondary data used to support this thesis is some Feasibility study reports of other companies for their real projects The quantitative data that is used concerns both hotel industry and construction industry

The primary data is the real figures of Financial Feasibility Analysis – JW Marriott Hotel project which used in BITEXO – the investor of project

Part II: Chapter 1

Part II of the thesis builds up the theoretical and practical basis for the analysis It contains the theoretical outline of the most relevant, those are: Definitions, conceptual foundations, major steps, criterions, guidelines used in Feasibility Study and Financial Feasibility Analysis

Part III: Chapter 2

This part contains information on evaluation methods with real figures of JW Marriott Hotel project and company’s decision on the project

Part IV: Chapter 3

On the basis of part III, Chapter 3 presents the conclusions and reflections of financial evaluation practice in Marriott project and then gives information on limitations and findings from the Feasibility analysis presented in chapter II This chapter also provides some recommendations in conducting a Financial Feasibility Analysis for a hotel project

Structure of the thesis

1.5 Thesis‟s limitation

The case used in this thesis is a real and very big project with an intensive capital, long life (50 years) At the time of this research, it was go further than two third ways of construction phase and going to be operating Thus, this thesis will not analyze the construction phase and assume that the total construction cost when completed in Quarter 1/2013 is not different from estimated one

Chapter 3: Comments and Recommendation

Being input and basis

for

Serving as basis for

Because the scope of analyzed case study is too big, so many things need to

be discussed in dept, but with the limited time, limited resource and knowledge, the author has to assume some factors are true and no more calculation and analysis Especially, the WACC factor ought to calculate because of its significant role in financial criterion calculation, but to conduct this figure, it requires a lot of time and relate to other projects and information of company, in some way, these information

is confidential, so I assume we use a WACC at a fixed rate to calculate other financial criterion

CHAPTER 1: LITERATURE REVIEW

First of all, this thesis will present a theoretical framework and help the reader make logical sense of the relationships of the variables and factors that have been deemed relevant/important to the problem It provides the understand how a hotel construction project run, what is financial feasibility analysis, why we have to make feasibility study before deciding to invest in a project This framework are use for general project, base on it, we can go further in analyze a specific case study

1.1 Overview of construction projects

1.1.1 Concept of project

A project is an undertaking that has a beginning and an end and is carried

out to meet established goals wihtin cost, schedule and quality objectives (Haynes,

Project Management)

A project often has the following characteristic:

- A defined beginning and end

- Resources allocated specifically to it

- Intended to be done only once (although similar separate projects could

be undertaken)

- Follows a plan towards a clear intended end-result

- Often cuts across organisational and functional lines

Project management can be defined as the planning, scheduling and

controlling of a series of integrated tasks such that the objectives of the project are

achieved successfully and in the best interest of the project’s stakeholders (Harold

Kerzner, PhD, Advanced project management 2 nd edition)

1.1.2 Project life cycle

Every project has beginnings, a middle period during which activities move the project toward completion, and an ending (either successful or unsuccessful) A standard project typically has the following four major phases (each with its own agenda of tasks and issues): initiation, planning, execution, and closure Taken together, these phases represent the path a project takes from the beginning to its end

Initiation phase: During the first of these phases, the initiation phase, the

project objective or need is identified; this can be a business problem or opportunity An appropriate response to the need is documented in a business case with recommended solution options A feasibility study is conducted to investigate whether each option addresses the project objective and a final recommended solution is determined Issues of feasibility and justification are addressed Once the recommended solution is approved, a project is initiated to deliver the approved solution and a project manager is appointed The major deliverables and the participating work groups are identified and the project team begins to take shape Approval is then sought by the project manager to move on the detailed planning phase

Planning phase: this phase is where the project solution is further

developed in as much detailed as possible and you plan the steps necessary to meet the project’s objectives In this step, the company identifies all of the work to be done The project’s tasks and resource requirements are identified, along with the strategy for producing them This is also referred to as scope management A project plan is created outlining the activities, tasks, dependencies and timeframes The project manager coordinates the preparation of a project budget; by providing cost estimates for the labor, equipment and materials costs The budget is used to monitor and control cost expenditures during project execution Once the project company has identified the work, prepared the schedule and estimated the costs, the three fundamental components of the planning process are complete This is an excellent time to identify and try to deal with anything that might pose a threat to the successful completion of the project This is called risk management In risk management, “high-threat” potential problems are identified along with the action

that is to be taken on each high threat potential problem, either to reduce the probability that the problem will occur or to reduce the impact on the project if it does occur This is also a good time to identify all project stakeholders, and to establish a communication plan describing the information needed and the delivery method to be used to keep the stakeholders informed Finally, you will want to document a quality plan; providing quality targets, assurance, and control measures along with an acceptance plan; listing the criteria to be met to gain customer acceptance At this point, the project would have been planned in detail and is ready

to be executed

Execution phase: During the third phase, the project plan is put into

motion and performs the work of the project It is important to maintain control and communicate as needed during execution Progress is continuously monitored and appropriate adjustments are made and recorded as variances from the original plan

In any project a project manager will spend most of their time in this step During project execution, people are carrying out the tasks and progress information is being reported through regular company meetings The project manager uses this information to maintain control over the direction of the project by measuring the performance of the project activities comparing the results with the project plan and takes corrective action as needed The first course of action should always be to bring the project back on course, i.e., to return it to the original plan If that cannot happen, the company should record variations from the original plan and record and publish modifications to the plan Throughout this step, project sponsors and other key stakeholders should be kept informed of project status according to the agreed upon frequency and format Status reports should always emphasize the anticipated end point in terms of cost, schedule and quality of deliverables Each project deliverable produced should be reviewed for quality and measured against the acceptance criteria Once all of the deliverables have been produced and the customer has accepted the final solution, the project is ready for closure

Closure phase: During the final closure, or closeout phase, the emphasis is

on releasing the final deliverables to the customer, handing over project documentation to the business, terminating supplier contracts, releasing project resources and communicating the closure of the project to all stakeholders The last remaining step is to conduct lessons learned studies; to examine what went well and what didn’t Through this type of analysis the wisdom of experience is transferred back to the project organization, which will help future project teams

(Source: Project Management for Scientists and Engineers by Merrie Barron and Andrew R Barron It is licensed under a Creative Commons Attribution License CC-BY 3.0)

1.1.3 Project’s aspects

Projects are defined by their scope, budget, and schedule For example, a company is to undertake a project to design and build a new commercial center (scope), at an estimate of $15 million (preliminary budget) over a three-year period (schedule)

 Scope: Each project is unique and must have a written requirements

document that takes into consideration operational needs, level of service, regulatory requirements and quality of deliverables

 Schedule: All projects must have a definite beginning and end Once

there is a well-defined scope, the Company needs to determine the time it will take

to complete the project by developing the project schedule Developing the schedule involves breaking down the work into manageable activities needed to accomplish the scope of each deliverable, estimating the duration of each activity, and placing them in a logical sequence A project schedule tells you the expected duration of the project and the logical relationships between the activities

resources Consequently, every project needs a budget to initially define its funding requirement The project manager develops the budget based on the cost estimates

at the beginning of each project phase and refines it once there is better information defining the scope Refining the budget occurs through studies and analysis in the design development process through the preliminary engineering phase When a company tries to fix the budget too early in the project life cycle, they can be surprised by the significant increases in the budget The budget, therefore, should not be fixed as baseline until after completion of the preliminary engineering phase

1.2 Features of Hospitality industry

The hospitality industry consists of broad category of fields within the service industry that includes lodging, restaurants, event planning, theme parks, transportation, cruise line, and additional fields within the tourism industry The hospitality industry is a several billion dollar industry that mostly depends on the availability of leisure time and disposable income A hospitality unit such as a restaurant, hotel, or even an amusement park consists of multiple groups such as facility maintenance, direct operations (servers, housekeepers, porters, kitchen workers, bartenders, etc.), management, marketing, and human resources

The hospitality industry covers a wide range of organizations offering food service and accommodation The industry is divided into sectors according to the skill-sets required for the work involved Sectors include accommodation, food and beverage, meeting and events, gaming, entertainment and recreation, tourism services, and visitor information

Product of Hospitality industry share the same unique characteristics of service industry product, the most commonly are:

For a hotel project, these features are very important points: Capital investment; usage rate; personel working; the growth of tourism industry

Capital investment: Depend on size of property, location, service standard, In

general, a hotel project requires a huge initial investment with long payback period A 5-star hotel project can be a several billion dollar project In operation phase, the cost cosists of multiple groups such as facility mainternance, direct operations, management, marketing and human resources

Usage rate: or vacancy rate is an important variable for a hotel project This rate

is similar to productive in a factory, while the factory does not operate, the fixed costs still be paid, so in hotel operating, maximize number of customers means increase profit for owner

Personnel working: Tourism is a people oriented industry requires persons

serving other persons The quality of human resource is a clear competitive advantage

The growth of tourism industry: This factor affects directly to a hotel project,

high growth rate will attract more international customers, a country has a high growth rate of tourism industry is also the one has economic prosperity and political stability

(Source: mix sources from internet, Wikipedia.org, Google search engine…)

1.3 Overview of Feasibility Study

1.3.1 Concept of a Feasibility Study

A Feasibility Study for a project can be defined as a controlled process for identifying problems and opportunities, determining objectives, describing situations, defining successful outcomes and assessing the range of costs and benefits associated with several alternatives in order to carry out the project A Project Feasibility Study is conducted in the initial and updated during the other

phases It is an analytical tool that includes recommendations and limitations, which are utilized to assist the decision makers when determining if the project is viable

1.3.2 Importance of a Feasibility Study

It is estimated that only one in fifty business ideas are actually viable Therefore, determining early that a business idea is not financially feasible can prevent loss of money and waste of valuable time Besides, the results from the feasibility study should outline the various scenarios examined and the implications, strengths and weaknesses of each idea

If a project is found feasible from the result of the study, the next step is to proceed with a full project plan The research information uncovered in the Feasibility Study will support the project planning and reduce research time, which helps reduces the cost of planning

Finally, a Feasibility Study is heavily based on market research and analysis, which provides decision makers with varying degrees of evidence that a project will

in fact be viable

1.3.3 Contents of a Feasibility Study

In order to support companies in decision making, a Feasibility Study should cover a various factors which have effects on the project Feasibility Study of a construction project usually includes the following analysis:

Economic feasibility analysis

Economic analysis is the most frequently used method for evaluating the effectiveness of a project More commonly known as cost/benefit analysis, the procedure is to determine the benefits and savings that are expected from a candidate system and compare them with costs If benefits outweigh costs, then the decision is made to design and implement the system An entrepreneur must accurately weigh the cost versus benefits before taking an action

Legal feasibility analysis

Legal analysis determines whether the project has enough legal base to be carried out and if the current legal system will create any obstacles against the project

Schedule feasibility analysis

A project will fail if (1) it takes too long to be completed before it is useful or (2) it comes into operation in inappropriate time Typically this means estimating how long the system will take to develop, when it should come into operation and if

it can be completed in a given time period using some methods like payback period Schedule feasibility is a measure of how reasonable the project timetable is Given our technical expertise, are the project deadlines reasonable? Some projects are initiated with specific deadlines You need to determine whether the deadlines are mandatory or desirable

Financial feasibility analysis

In case of a new project, financial viability can be judged on the following parameters:

 Total estimated cost of the project

 Financing of the project in terms of its capital structure, debt equity ratio and promoter's share of total cost

 Existing investment by the promoter in any other business

 Projected cash flow and profitability

The first three analyses will give basic understanding for assumptions and other components in Financial Feasibility Analysis Although they may not provide information which is a perfect fit to the proposed business model, they will provide

a strong starting point for future analysis In this thesis, such analyses are hereinafter called “Environment Feasibility Analysis”

1.4 Environment Feasibility Analysis Models

Business and market analysis will contribute considerably to the Financial Feasibility Analysis; they give a basic understanding to make assumptions and other components of the FFA report Consideration should be given to using traditional business analysis techniques such as SWOT, Porters Five Forces and PEST Although they may not provide information which is a perfect fit to the proposed business model, they will provide a strong starting point for future analysis

These below model will be used to analyze external environment of the case study They are PEST model and Five Forces model

1.4.1 PEST model

The dynamics of the world economy set the overall economic context for

organizations, but Economic developments are influenced by Political Social and

Technological factors These can be examined using the framework referred to as

PEST analysis

The objectives of carrying out a PEST analysis for any organization are to:

1 Determine the key environmental influences on that organization

2 Examine the impact of the external influences

Political factors include changes in the government or in government

policies For example, the government current policies on imposing special tax on imported motorbikes or increase the registration fee for new motorbikes in big cities could have a large impact on the lubricant demand

Economic factors refer to the national economic development indicators,

such as GDP per person, annual growth rate, inflation, investment, etc For example, the development of Vietnamese economy in the last decade has booted the demand for motorbikes and automobiles This in turn creates a big need for lubricant

Social factors are culture, customs, habits, or shared beliefs How fast people

will change their habit of using their own motorbikes to taking buses? How fast a distributor will change his/her habit of doing business from entrepreneurial, short-

Economic Environment Social

Political

Technological

term oriented into more professional and long term oriented? Often, it takes a long time

Technological factors could include level of technology in the economy and

the development of infrastructure For example, in many state-owned enterprises, the machines they used were out-of-date Does it imply anything to be lubricant suppliers? Or does the underdevelopment of the infrastructure influence the demand for lubricant?

Figure 1.1: PEST Model

The PEST analysis can also help to examine the differential impact of external influences on an organization, either historically or in terms of likely impact

1.4.2 Five forces model

Source: Adapted/reprinted with permission of The Free Press, an imprint of

Simon& Schuster, from Competitive Strategy: Techniques for Analyzing Industries

and Competitors by Michael Porter

Five factors are presented in figure 1.3, in which, a strong force can be regarded as a threat because it is likely to reduce profits In contrast, a weak force can be viewed as an opportunity because it may allow the company to earn greater profits

Thread of new entrants:

New entrants are newcomers to an existing industry They typically bring new capacity, a desire to gain market share, and substantial resources Therefore, they are threats to an established corporation The thread of entry depends on the presence of entry barriers and the reaction that can be expected from existing competitors An entry barrier is an obstruction that makes it difficult for a company

to enter an industry Some of the possible barriers to entry are the following:

- Economies of Scale

- Product differentiation

- Capital requirements

- Switching costs

- Access to distribution channels

- Cost disadvantages independent of size

Figure 1.2: Forces Driving Industry Competition

- Government policy

Rivalry among existing firms

Rivalry is the amount of direct competition in an industry In most industries, corporations are mutually dependent A competitive move by one firm can be expected to have a noticeable effect on its competitors and thus may cause retaliation or countervailing efforts According to Porter, intense rivalry is related to the presence of the following factors:

- Number of Competitors

- Rate of Industry Growth

- Product or Service Characteristics

- Amount of Fixed Costs

- Capacity

- Height of Exit Barriers

- Diversity of Rivals

Substitute Products or Services

Substitute products are those products that appear to be different but can satisfy the same need as another product According to Porter, “Substitutes limit the potential returns of an industry by placing a ceiling on the prices firms in the industry can profitably charge” To the extent that switching costs are low, substitutes may have a strong effect on an industry Sometimes a difficult task, the identification of possible substitute products or services means searching for products or services that can perform the same function, even though they may not appear to be easily substitutable

Bargaining Power of Buyers

Buyers affect an industry through their ability to force down prices, bargain for higher quality or more services and play competitors against each other A buyer

or distributor is powerful if some of the following factors hold true:

- A buyer purchases a large proportion of the seller’s product or service

- A buyer has potential to integrate backward by producing the product itself

- Alternative suppliers are plentiful because the product is standard or undifferentiated

- Changing suppliers costs little

- The purchased product represents a high percentage of a buyer’s costs, thus providing an incentive to shop around for a lower price

- A buyer earns low profits and is thus sensitive to costs and service differences

- The purchased product is unimportant to the final quality or price of a buyer’s products or services and thus can be easily substituted without adversely affecting the final product

The Bargaining Power of Suppliers

Suppliers can affect an industry through their ability to raise prices or reduce the quality of purchased goods and services A supplier or supplier group is powerful if some of the following factors apply:

- The supplier industry is dominated by a few companies, but it sells to many

- Its product or service is unique or it has built up switching costs

- Substitutes are not readily available

- Suppliers are able to integrate forward and compete directly with their present customers

- A purchasing industry buys only a small portion of the supplier group’s goods and services and is thus unimportant to the supplier

1.5 Financial Feasibility Analysis

1.5.1 Concept of Financial Feasibility Analysis

Financial feasibility analysis is an analytical tool used to evaluate the

economical viability of an investment It consists of evaluating the financial condition and operating performance of the investment and forecasting its future condition and performance A financial decision is dependent on two specific factors, expected return and expected risk, and a financial feasibility analysis is a

means for examining those two factors (Fabozzi and Peterso, 2003)

1.5.2 Purposes of Financial Feasibility Analysis

Financial Feasibility Analysis is usually conducted during the initial and planning phases The reasons to well prepare a Financial Feasibility Analysis can be easily seen are:

 Focuses on the investigation of the overall financial situation around the project;

 Quantifies relatively benefits from business alternatives, so that the company can compare easily and choose out the best option;

 Identifies new opportunities and obstacles through the investigation process;

 Enhances the probability of success by addressing and mitigating factors early on that could affect the project;

 Helps in securing funding from lending institutions and other monetary sources;

 Helps to attract investments from other partners;

 Give a benchmark when adapting project to new conditions

Analyzing the financial feasibility of a project is an essential part of the decision-making process Even though the analysis is used on the first stages of the decision-making process as a screening method, the analysis should also be used throughout the process and should be updated every time any of the assumptions it

is based on changes The company will decide if the business idea is discarded based on the result of the analysis It is, therefore, very important to regularly update the analysis and verify that, given the newest information, the project is financially feasible

1.5.3 Conducting a Financial Feasibility Analysis

When conducting a financial feasibility analysis, certain assumptions about the investment project should be used The more accurate and reliable the assumptions are, the more realistic and precise the analysis is If a reasonable change in an assumption could make the project change from successful to unsuccessful, the assumption should be considered a key element Besides, the results of a financial feasibility analysis as also rely on the data used as input for the analysis Data has to be collected from the project’s owners and from outside sources, and often specialists within the field of the project are needed to make estimates and forecasts, in order to get as accurate assessment as possible

Hofstrand and Holz-Claus (2009) suggest using the following outline when conducting financial feasibility analysis:

• Estimate the total capital requirements – capital for facilities and

equipment, working capital, start-up capital, contingency capital, etc;

• Estimate equity and credit needs - identify equity sources and capital

availability, identifies credit sources, assess expected financing requirements, and establish debt to equity levels;

• Budget expected costs and returns of various alternatives – estimate

expected cost and revenue, the profit margin and expected net profit, the sales or usage needed to break-even, the returns under various production, price and sales levels,

assess the reliability of the underlying assumptions of the financial analysis, create a benchmark against industry averages and/or competitors, identify limitations or constraints of the analysis, construct expected financial statements, etc

When covering the above contents, different scenarios will be considered It is important to prepare a model to analyze such scenarios and make projections The model should capture as many interdependencies among variables as possible, and should be structured in a way that makes it easy to change the values of the independent variables and observe how the change affects the values of the key dependent variables

Tjia (2004, p 14) suggests considering the following key design principles when building a model:

• Keep the model simple;

• Have a clear idea of what the model needs to do;

• Be clear about what the users want and expect;

• Maintain a logical arrangement of the parts;

• Make all calculations in the model visible;

• Be consistent in everything you do;

• Use one input for one data point;

• Think modular;

• Provide ways to prevent or back out of errors;

• Save in-progress versions under different names, and save them often;

• Keep testing

1.5.4 Criteria for a Financial Feasibility Analysis

In order to evaluate the financial feasibility of and investment project, relevant measurements or criteria need to be specified In general, the evaluation methods can be categorized into five basic types:

- Net present value methods;

- Rate of return methods;

of investment projects

There are several different cash flow based methods that can be used to measure the financial feasibility of investment projects, such as the Net Present Value (NPV), Internal Rate of Return (IRR), Annual Equivalent Worth (AE) and Benefit- Cost Ratio (B/C) This thesis concentrates on some criteria that are commonly used in Financial Feasibility Analysis, i.e NPV, IRR, Payback period and Discounted Payback Period

The payback period is another method that is sometimes used in financial feasibility analysis The method determines when the project will break even, i.e how long it takes for revenues to pay investment outlays However, the method does

not measure profitability, as it only measures the time it takes to recover the initial investment outlay but not the profit that is made after paying back the initial investment The method ignores all revenues and cost after the payback period and does therefore not allow for the possible advantages of a project with a longer economic life Also, the method does not recognize the time value of money, though that can be remedied by using the discounted payback method Due to these drawbacks, the payback method is not suitable for measuring financial feasibility, and will therefore not be considered further in this thesis (Park, 2002)

Finally, financial ratios can be of use when analyzing financial feasibility Financial ratios are calculated from the financial statements of a company and are generally only used for companies in operation However, the projected financial statements can be used to calculate the relevant ratios in order to gain a better understanding of the performance of the project Nevertheless, projected financial ratios should not be used independently as an analytical tool, but only in addition to the cash flow analysis

1.5.4.1 Net present value (NPV)

For a project with one investment outlays, make initially, the net present value is the present value of the future after – tax cash flows minus the investment outlay, or

Outlay r

CF NPV

CFt After-tax cash flow at time period t

r The required rate of return on the project

n The project’s economic life in periods

Outlay Investment cash flow at time zero

Because the NPV is the amount by which the investor’s wealth increases as a result of the investment, the decision rule for the NPV is as follows:

Invest if NPV > 0

Do not invest if NPV < 0 Positive NPV investments are wealth-increasing, whereas negative NPV investments are wealth-decreasing

Many investments have cash flow patterns in which out flows may occur not only at time zero, but also at future dates It is useful to consider the NPV to be the present value of all cash flows:

n nr

CF r

CF r

CF CF

NPV

) 1 (

) 1 ( ) 1

2 1

1 0

r

CF NPV

0 ( 1 ) (*)

In Equation (*), the investment outlay, CF0 is simply a negative cash flow Future cash flows can also be negative

1.5.4.2 Internal Rate of Return (IRR)

The Internal Rate of Return is one of the most frequently used concepts in Financial Feasibility Analysis For project with one investment out lay, made initially, the IRR is the discount rate that makes the present value of the future after-tax cash flows equal that investment outlay Written out in equation form, the IRR solves this equation:

The left-hand side of this equation is the present value of the project’s future cash flows, which, discounted at the IRR, equals the investment outlay This equation will also be seen rearranged as:

0 )

1 (

CF

n

t

t t

The above equation looks like the NPV equation, except that the discount rate is the IRR instead of r (the required rate of return) Discounted at the IRR, the NPV is equal to zero

The decision rule for the IRR is to invest if the IRR exceeds the required rate

of return for a project:

Invest if IRR> r

Do not invest if IRR<r

Many investments have cash flow patterns in which the outlays occur at time zero and at future dates Thus, it is common to define the IRR as the discount rate and makes the present values of all cash flows sum to zero:

0 ) 1

NPV and IRR: A comparison

The NPV and IRR technique share a number of similarities First, both are

discounted cash flow techniques that focus on the magnitude and timing of the

project’s cash flows Seconds, because greater project risk implies greater

shareholder required returns, both methods can accommodate differences in project

risk easily by simply adjusting the project’s required rate of return Finally, subject

to some important exceptions that we’ll talk about shortly, the NPV and IRR yield the same accept-reject decision for independent projects Since the IRR is the

discount rate that makes the projects’ NPV zero, any investment whose IRR is greater than the required rate of return will have a positive NPV Conversely, projects with an IRR that is lower than the required rate of return must have a negative NPV

However, there are several important differences between the two decision criteria that cause problems with the use of the IRR in some circumstances First, the NPV method is an absolute measure of project worth in dollar terms and represents (in theory) how much the market value of the firm will rise if the project

is accepted The IRR, on the other hand, is a relative measure and tells us something about the return per dollar invested This can create conflicts between the NPV and IRR in ranking mutually exclusive projects if there are (1) large differences in the initial investments and/or (2) significant differences in the timing of project cash inflows

Another potentially troubles some problem with the use of IRR is that when

a project has an initial cash outflow, a series of positive cash inflows, and then at least one additional cash outflow, there may be more than one IRR; that is, more than one discount rate will produce a zero NPV

1.5.4.3 Payback Period

A number of alternatives to the NPV and IRR decision criteria do not rely on discounted cash flows Two of the most widely used techniques are the payback period and the accounting rate of return

The payback period is the time necessary to recoup a project’s initial investment from its future cash flows

Companies frequently require that the cumulative expected cash flows from

a project recover or “pay back” its investment cost within a maximum time period

As a decision rule, the payback period is easy to apply: Projects with a payback of less than some maximum cutoff period are accepted; those with longer

paybacks are rejected In ranking mutually exclusive projects, investments with shorter payback periods are preferred

The payback period was once the most popular method for making investment decisions It’s still widely used because it is simple to understand and easy to apply Further, the payback period has some value as a measure of project liquidity because it tells us how quickly a project’s cash flows are recouped In addition, the PP provides us with a rough measure of project risk because in many investment settings cash flow estimates become more uncertain as time progresses

Despite these desirable features, the PP has a number of serious drawbacks First, as a summary measure of project worth, the PP ignores the time value of money by focusing exclusively on the time it takes to recover the project’s cost Second, it ignores cash flows after the PP and in doing so biases the capital-budgeting process against long-lived projects Finally, there’s really no convenient way to directly link investors’ required rates of return and maximum payback period As a result, the potential for conflicts of interest between owners and managers is high

1.5.4.4 Discounted Payback Period (DPB)

Payback’s inability to deal with the time value of money can be overcome by looking at the DTT, the time it takes a project to recoup both the initial investment and the project’s required rate of return

The discounted payback period is the length of time it will take to make the project’s NPV zero

The DPB is the shortest period of time that satisfies the following equation:

Outlay k

CFDPB

DPB Discounted payback period

CFt Cash flow in time period t

k The required rate of return on the project

Outlay Initial investment outlay in time zero

If the project’s NPV <0, then the DPB = ∞

However, the DPB suffers from some of the same drawbacks as simple payback First, it also ignores cash flows beyond the payback period Further, the maximum DPB used for project acceptance still reflects management’s risk preferences rather than the shareholders’

1.5.5 Risk analysis methods

It is not easy to measure the risk of an investment There are different ways

of measuring risk, depending on the degree and manner in which the analysts attempt to quantify the risk There are four methods includes: sensitivity analysis, scenario analysis, break-even analysis and simulation analysis Two of these will be presented in this thesis

1.5.5.1 Sensitivity Analysis

Sensitivity analysis is a valuable technique for project risk analysis and it is a very powerful tool which can be used to analyze the variability in project’s financial feasibility Risk analysis can be conducted using several methods, all of which estimate how changes in input data affect the outcome of the financial assessments such, is widely used in business

In financial evaluation of projects, Sensitivity analysis examines how sensitive a particular NPV calculation is to changes in underlying assumptions Sensitivity analysis is also known as what-if analysis and BOP (Best, Optimistic, and Pessimistic) analysis

An “NPV calculation using sensitivity analysis” can be used for a number of

purposes First, it indicates whether NPV analysis should be trusted Second, it

shows where more information is needed, for example: if the effect of incorrect estimates on revenues is so much greater than the effect of incorrect estimates on costs, more information about the factors determining revenues might be needed

1.5.5.2 Scenario Analysis

Sensitivity analysis treats each variable in isolation when, in reality, the different variables are likely to be related For example, if ineffective management allows costs to get out of control, it is likely that variable costs, fixed costs, and investment will all rise above expectation at the same time To minimize this problem, financers frequently perform scenario analysis, a variant of sensitivity analysis This approach examines a number of different likely scenarios, where each scenario involves a confluence of factors

An alternative to changing a single variable at a time is to identify different scenarios The base case assumptions might be viewed as a most likely scenario Similarly, one could conceive of a pessimistic scenario in which the assumptions reflect a situation where things don’t go as well as the most likely scenario For example, number of hotel room might be rose, which in turn might mean future hotel market is harder, and the room price is lower Scenario analysis allows the analyst to see how much investment performance is affected by a combination of negative or worst case assumptions Likewise, a set of optimistic assumptions would be identified that indicates how well the investment would perform if everything goes well

CHAPTER 2: OVERVIEW AND FINANCIAL FEASIBILITY ANALYSIS OF JW MARRIOTT HOTEL PROJECT

This chapter will present case study of project in BITEXCO – the JW Marriott Hotel project This case also is used to demonstrate evaluation process; therefore, will primarily consist of an overview of the factors that should be addressed in each project, particularly those factors that will serve as the base for assumptions make during the feasibility study

In the first part of this chapter, an overview of JW Marriott will be descriped, then analyse the environment A method of financial feasibility analysis is present step

by step with real figures

2.1 Overview of Project Investor

Binh Minh Import-Export Production and Trade Co., Ltd (BITEXCO) - a 100% Vietnamese owned, from a small textile enterprise in Thai Binh province in

1985 with chatter capital of only VND753 million which has raised up to VND711.7 billion since April 2009

Currently, as a multi – industrial corporation, BITEXCO has achieved much success in various fields, i.e real estate, hydro – power, infrastructure construction, mining investment and mineral water manufacturing and etc

In real estate sector, leveraging on its experience and expertise, BITEXCO has developed various high profile projects in Hanoi and Ho Chi Minh City such as The Manor in Hanoi and Ho Chi Minh City, The Garden Hanoi, Bitexco Office Building and 68-storey Bitexco Financial Tower in Ho Chi Minh City Other current large – scale developments underway include J.W Marriott Hanoi Hotel, Nguyen Cu Trinh quadrangle Complex, Ben Thanh Twin Tower and Hoang Mai Township

In the relentless pursuit of growth and prosperity, BITEXCO has built its fame with Vietnam’s sustainable development and global integration The key to success is the vision of its leaders, the reliability of its partners and the loyalty of its customers BITEXCO’ aim is to become one of the top corporations of Vietnam and

an internationally competitive company with quality and state-of-the-art products

and services while exceeding the expectations of its customers

Bitexco has carried out a lot of projects in different fields, which has created and enhanced the prestige of Bitexco, including:

Real estate Projects

 In Ho Chi Minh City

1 Bitexco Office Building

2 Bitexco Financial Tower

3 The Manor, Ho Chi Minh City

4 Ben Thanh Towers, HCM City

5 Quad Corner Nguyen Cu Trinh new urban centre

 In Hanoi

1 The Garden Hanoi

2 The Manor Hanoi

completion, the plant will start to generate electricity, greatly contribute to the socio – economic development of the poorest mountainous area of Vietnam

1 Se San 3A Hydropower project

2 EaKrông rou Hydropower project

3 Binh Dien Hydropower project

4 Ho Ho Hydropower project

5 Nam Muc Hydropower project

6 Nho Que 1 Hydropower project

7 Ta Trach Hydropower project

8 Nho Que 3 Hydropower project

9 Tra Xom Hydropower project

Infrastructure and road projects

1 The Thanh Hoa Diversion Road project

2 The Dau Giay – Phan Thiet expressway

3 Chu Van An Road

4 Road connecting highway 1A-1B and Reciprocal project

 Project name:

“JW Marriott Hotel in Hanoi”

Brand positioning: Marriott Hotels and Resorts is the flagship brand within the

quality-tier or full-service hotels and resorts for Marriott International

Product positioning: The Hotel will be positioned at a higher level to that of the

existing quality-tier, full-service hotels in the Hanoi market The Hotel is

anticipated to capture a higher proportion of exhibition and corporate related business than the existing hotels in the market (which will likely retain their

meeting-share of transient business) due to its proximity to the National Convention Center The relocation of the Hanoi Government offices alon with the development of top-grade offices in the vicinity will undoubtedly lift the status of My-Dinh Me-tri as a destination and of the Hotel

JW Marriott is a brand name with over 75 years of hospitality excellence:

1927: J.Willard and Alice Marriott open a 9-seat root beer stand called The Hot Shoppe

1953: Company stock first ofered to public, selling out in 2 hours

1957: First hotel opens, the Twin Bridges Marriott Motor Hotel in Arlington, VA 1968: Stock first listed on NYSE

1981: Marriott opens ít 100th property, the Maui Marriott in Hawaii

1983: Mariott founds the select-service segment with its introduction of Courtyard

by Marriott

1987: Mariott launches Fairfield Inn and acquires the Residence Inn Cổpration 1995: Mariott International purchases 49% interest in Ritz-Carlton Three years later, that interest was increased to 99%

1997: Marriott acquires Renaissance Hotel Group thereby adding the Renaissance, Ramada International, and New World brands to its portfolio

1998: Marriott introduces SpringHill Suites

1998: Marriott builds on extended-stay expertise and introduces TownePlace Suites 2000: Marriott expands the Fairfield Inn brand with the brand extension Fairfield Inn & Suites

2002: Marriott celebrates its 75th Anniversary and is a proud sponsor of the Winter Olympics

2003: Marriott opens its 2,500 property

2004: MARSHA (reservation system) celebrates 20 years of successful service

Marriott Rewards welcoms its 20,000,000th member

2005: Internet sales totaled USD 3.2 billion in 2005, 42% over 2004 levels Nearly 85% of Internet sales were booked on Marriott.com

 Project location:

The project is located at C and H1 plots, inside the National Convention Centre (NCC) area, with total space of 64ha at Me Tri commune, Tu Liem district and Trung Hoa precinct, Cau Giay district, Hanoi This area includes plot A – National Convention Centre; plot B – Museum; plot C – JW Marriott Hotel; the rest space include a square, an underground parking area, a park, water surface and an internal transport system

- To the Northwest of land is Me Tri new urban area, Me Tri commune

- To the West and Southwest is the old village renovation and refurbishment

- To the South and Southeast is Thang Long Avenue

- To the East is planned intersections Thang Long Avenue and ring road 3

- To the Northeast is ring road 3

This is the appropriate space to develop a five star hotel because it lay on a quite high land, belong to the Western developing area of Hanoi, where will be the new economic and politic center of Capital

 Land situation:

Project land is completely cleared and graded Project management unit (PMU) of National Convention Centre already handed over this land to BITEXCO since middle of July 2005

 Project scale