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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 1.2 Research questions .2 1.3 Data resources .2 1.4 Thesis structure .3 1.5 Thesis’s limitation CHAPTER 1: LITERATURE REVIEW 1.1 Overview of construction projects 1.1.1 Concept of project 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 vi 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 vii 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 viii 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 ix 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 star hotels in Hanoi 49 Table 2.6: Forecasted room price for JW Marriott hotel 50 Table2.7: The average occupancy rate of star Hotels in Hanoi in 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 x 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 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 1.2 Research questions The following research questions have been formulated for achieving the goal of this thesis: 1- What are the methods and criteria considered in a Financial Feasibility Analysis of a project? – Which method and how BITEXCO are applying to evaluate a project in reality? - What are useful recommendations to conduct a Financial Feasibility Analysis for a hotel project? 1.3 Data resources Generally, the theory distinguishes between primary and secondary data, while primary data is data where the researcher is actively involved in collecting it, 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 1.4 Thesis structure The thesis is split up into four main parts and main chapters Figure shows this in a systematic way Part I: Introduction Part I give an introduction into the topic and describe the overall setting This part also describes the methodology used in research design, research question, and limitation Thus, it represents the overall framework for the whole thesis Part II: Chapter 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 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 On the basis of part III, Chapter 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 Part I INTRODUCTION Part II Chapter 1: Theoretical framework Being input and basis for Part III Chapter 2: Analysis of JW Marriott Hotel case study Serving as basis for Part IV Chapter 3: Comments and Recommendation 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 authorities/lenders and the company Soft cost 2.1 Consultant fee The company may have to hire consultant for each part of construction execution, i.e.: - Architecture Consultant - Structural Engineer Consultant - Foundation Consultant - MEP Consultant - Fire & Life Safety Consultant - Interior Design Consultant - Kitchen and Laundry Equipment - Consultant on ID Restaurants - Consultant on FF&E and OSE - Procurement - Faỗade Consultant - Quality Certification - Quantity Certification Consultant fees are often paid monthly, but some consultant service like design consultant or quality certification consultant are often paid based on work flow Such consultants not only consult the design of the functional areas but they also have to monitor construction execution; therefore, the last payment for them will be after the functional areas are finished, tested and handed over to the company 79 2.2 Insurance fee Such fee is paid to ensure that during construction phase, if there is any accident the company can be compensated Each insurance company offer different insurance policies, however, for FFA estimation, the company can set insurance fee at about 0.1% total construction cost 2.3 Investigation cost This cost is for location investigation, geology study of the lot in order to have suitable design and construction methods Investigation is often at 0.5% soft cost 2.4 Project and Construction Management Cost When the project is constructed, the company can manage themselves or hire a professional project and construction management company Such consultant may report periodically to the company They are often paid monthly depending on their work load in such month This cost depends on service supplier also Hard cost 3.1 Foundation The amount and payment plans of 3.2 Superstructure such costs are often planned by quantity consultant The company should review their plan and base on the company’s payment custom to set a more realistic payment 3.3 MEP 3.4 Transportation 3.5 Faỗade plan It should be noted that each 80 package is executed at different 3.6 Information system time, i.e superstructure package 3.7 Kitchen and Laundry can only start after foundation package is done, and transportation package can start when MEP is partially finished In each period, 3.8 Finish 3.9 FF&E the company should have priority lists for payment so that they can 3.10 OSE be positive in raising capital for the project Interest Interest is estimated based on withdrawal plan and expected interest rate It will depend much on the payment plan that the company set above Interest rate can be estimated based on current loan interest rate on the market and its future forecast Contingency Contingency is a backup for the rise in total investment Contingency rate is often set from 5% to 10% b Operation phase In this phase, there are two main parts the company has to plan: revenue and cost Revenue In a hotel, there are often kinds of revenue, which are shown in the below table Each year, the price for each service is often raised, usually at 5% No Kinds of revenue Room revenue Estimation notes Room revenue depends on (1) number of room of each kind, (2) room rate, (3) occupancy rate When estimating room rate and occupancy rate, the company should base on information of environment analysis in order to avoid 81 too optimistic model For example, the project is a five star hotel but far from local economic centre and has no preponderant service than other hotels; room rate should be set a little lower rate than other hotels Similarly, occupancy rate should be estimated at the average occupancy rate of other hotels at the same level Food and Beverage Usually, food and beverage revenue is set based on room revenue revenue Food and beverage is often at 30% to 40% of room revenue Conference revenue Conference revenue is often calculated based on the capacity of meeting room, price per person and occupancy rate For example, a grand room has a capacity of 700 guests and the estimated cost for guest is USD15 per guests, the estimated price/room/day can be estimated at USD10,500 Occupancy rate is based on demand of the surroundings, and the meeting centre’s capacity near the project Shop revenue Square of shop in a hotel is often a small area, the price therefore is often 1.5 or times higher than leasing price in a shopping centre Based on leasing price on the market, the company can estimate the price per m2 in the hotel Other revenue (telephone, Such services accounts for a small part of revenue only fax…) are often used by guests staying in the hotel Such revenue is often at 10% of room revenue only Operation Expenses A hotel’s operation expenses include departmental expenses and undistributed expenses Departmental expenses are particular expenses for each service; they often include staff salary and reward, goods’ costs, utilities costs… for providing each service Undistributed expenses are payment for general 82 administrative activities, i.e marketing fee, management expense, land lease payment, insurance, FF&E and etc When planning, it should be noted that, year over year such expenses may rise because of inflation rate but they may not rise at inflation rate The company should have analysis to find out the rising rate of input services of some year period around planning time so as to estimate more accurately expense rising rate Bases for estimating operation expenses are shown in below table: No Expense items Departmental expenses Notes In hotel industry, there are benchmarks for departmental expenses as followed: - For room revenue: 25% to 30% room revenue - For F&B revenue: 40% to 50% F&B revenue - For conference revenue: 40% to 50% F&B revenue - For shop: 5% to 10% shop leasing revenue - For other revenue: 20% to 25% other revenue General expense for This is cost for water, electricity, marketing related marketing, utilities, office salary and reward expenses and salary and reward for office staff… Such expense often accounts for 9% to 10% gross revenue Fee for management If the company hires a company to manage the hotel, outsourcing service they will have to pay for management service Such fee depends on price policy of service suppliers Training expense Senior human resources of a hotel can change from year to year Therefore, training program to help newcomers to understand current operation system of the hotel is very important Based on the company training policy (the number of people each year and cost for each person), such cost can be estimated For example, the company allows people to be trained a year with a cost 83 of USD700/person/year, training costs for a year may be USD3,500/year Insurance expense Every year, the company has to buy insurance for accidents happening during operation period Such insurance expense is calculated as 0.8% to 1% of total construction investment depending on service package offered by insurance companies FF&E expense After a long time of usage, it is necessary for the hotel to buy new FF&E FF&E expense varies from 1% to 5% of gross revenue In some first operation years, the rate is often low because less FF&E need replacing than the following years Land lease payment Land lease payment is set based on the land lease contract between the company and the local authority/lenders Based on the revenue, operation cost and total construction cost mentioned above, the company can easily construct a cash flow and calculate NPV and IRR for the project Carry out risk analyses After construct cash flow for the project, the company should carry out sensitivity analysis and scenario analysis to define NPV is the most sensitive to which variables, the worst and the best cases the project can be According to the results of such analyses, the company can easily define variables’ range in which NPV is positive The company should compare the range with the current market so as to find out possible risks to the project, which supports the company much in conducting future business strategy for the project 84 CONCLUSION In this thesis the role of financial feasibility analysis in the decision-making process has been discussed, and ways to conduct financial feasibility analysis for a hotel project have been studied A general model, which can be used to assess the financial feasibility of investment projects, was presented and effective modelbuilding techniques were introduced Also, a new approach of using optimization to find the financing requirements of investment projects was presented A hotel project was used as a case study to illustrate how the financial feasibility of an investment project can be analyzed using a custom made assessment model Risk analysis methods were introduced Three research questions were defined at the beginning of the thesis: Question 1: What are the methods and criteria considered in a Financial Feasibility Analysis of a project? Before conducting a Financial Feasibility Analysis, it is important to carry out environment analysis so that the figures estimated in the FFA are realistic and accurate The most useful criteria for analyzing financial feasibility are the NPV, and IRR The cash flows of the prospective investment project should be projected and these criteria should be used to assess the project’s financial feasibility Beside such criteria, it is important to conduct risk analyses to evaluate more precisely Question 2: What method and how BITEXCO are applying to evaluate a project in reality? The thesis has studied the case of JW Marriott Hotel project which is under construction at the study time For this project, Bitexco has carried out environment analysis and use NPV, IRR to evaluate financial feasibility However, Bitexco has some limits in assuming variables, which makes assumptions in the model a little optimistic Besides, Bitexco skips risk analyses, so some bad cases cannot be seen 85 Question 3: What are useful recommendations to conduct a Financial Feasibility Analysis for a hotel project? Like other kinds of project, Financial Feasibility Analysis for a hotel project is conducted based on information from environment analysis and use criteria as NPV and IRR However, in assumption, a hotel project has its own special features and benchmarks Such notes are introduced clearly in chapter of the thesis The decision-making process for large projects is very complicated and obviously all aspects could not be covered in this thesis This thesis introduced criteria and methods which are used the most in Vietnam only Besides which mentioned in this thesis, there are many other criteria can be used to evaluate the feasibility of a project 86 REFERENCES Project Management by Haynes Advanced project management 2nd edition by Harold Kerzner, PhD 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 Competitive Strategy: Techniques for Analyzing Industries and Competitors by Michael Porter Morden corporate finance by Alan.C – Shapiro – Sheldon D Balbirer CBRE report Report on hospitality industry 2012 by Thormton Vietnam - Audit company ACCA study text paper P3 – Business analysis, for exam 2011 Website www.Chudu24.com Website www.Agoda.com 87 APPENDICES APPENDIX 1: CONSTRUCTION COST Exchange rate of VND/USD 20,700 CONSTRUCTION COST I INFRASTRUCTURE COST 205,093,400 2% Infrastructure cost II SOFT COST USD 3,241,274 3,241,274 Mil VND 4,008,196 67,094 67,094 9% 17,841,605 369,321 Consultant fee 65.3% 11,650,990 241,175 Project and Construction Manager 30.2% 5,396,823 111,714 Insurance fee 1.0% 184,437 3,818 Investigation cost 0.6% 109,355 2,264 Management expense 2.8% 500,000 10,350 Total III HARD COST Foundation Main contract & MEP 17,841,605 78% 1% 55% 88 159,807,481 2,030,011 369,321 3,305,443 42,021 1,830,368 88,423,597 Vertical Transportation 1% 823,900 Faỗade 7% 10,920,250 17,055 226,049 Information Resources and A/V D6 B 3% 4,162,913 83,600 Kitchen and Laundry 3% 4,513,905 93,438 Finish 19% 30,088,386 622,830 FF&E 9% 13,643,868 282,428 10 OSE 3% 4,950,000 102,465 11 Mock up room 0% 250,651 Total construction cost before contingency and interest Contingency 180,890,360 6% Total construction cost before interest Interest 12,742,292 193,632,652 5.6% Total construction cost 11,460,748 205,093,400 89 5,188 3,744,430 263,765 4,008,196 237,237 4,008,196 APPENDIX 2: ROOM PRICE OF STAR HOTEL 2012 RESEARCH Tên khách sạn Tên phòng Số phòng 1- Khách sạn Hilton Hanoi Deluxe Opera, Q Hoàn Kiếm Executive Deluxe Giá phòng TB phòng TB (m2/ph) (USD/p) (agoda.vn) Giá phòng TB (USD/p) (vi.hotels.com) (sau disc) 34m2 213 185 36m2 340 233 75m2 615 NA 30m2 222 169 68 m2 450 318 Phòng Classic 32m2 300 209 Phòng superior 37m2 345 250 365 270 269 Phòng hộ Deluxe 2- Khách sạn Meliá Hà Nội, Q Hoàn Kiếm Diện tích 306 Executive Deluxe 5- Khách sạn Sofitel Metropole Hà Nội, Q Hồn Kiếm InterContinential Hà Nội Westlake Phịng LUXURY 48m2 364 PRESTIGE SUITE 64m2 482 350 OPERA SUITE 70m2 550 650 IMPERIAL SUITE 200m2 3000 Deluxe Hanoi View Room 50m2 275 179 Deluxe Weslake View 43m2 202 159 ATELIER 60m2 369 219 LOTUS SUITE 70m2 547 279 PRESIDENTIA L 305m2 4500 Source: website khachsan.chudu24.com and agoda.vn 90 APPENDIX 3: JW MARRIOTT HOTEL „s DESIGN THÔNG TIN CHUNG JW MARRIOTT HÀ NỘI 91 92 93 ... Product of Hospitality industry share the same unique characteristics of service industry product, the most commonly are: o Intangiblity o Inseparability o Heterogeneity o Perishability o Ownership... 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... 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