W6_APE_Low Cost Hotel Accommodation-LCHA, ERR & Payback Period


  1. Problem Definition

For W6 blog, I will use the W5 data to find ERR and perform calculation for payback period.

 Figure 1

 Figure 1 KL Container Hotel

 

  1. Identify the Feasible Alternative

Same with blog W5, I use three options of bed occupancy with the same tariff which is 150 k-IDR as present below:

 Figure 2

 Figure 2 Bed Occupancy Options

  1. Development of the Outcome for Alternative

The constraints and assumptions are the same with blog W5, and they are:

  • Ex Container lifetime is 15 years for 10% salvage value
  • The hotel tariff price per night is 150 k-IDR
  • ϵ or i for MARR = 17%
  • The hotel area will be in East Bandung

The result of my simulations based on references[1], [2], [3]are present hereinafter:

 Figure 3

Figure 3 Final Result of Simulations

Figure 4

Figure 4 Payback Calculations for IRR & ERR

  1. Selection Criteria

This simulation is to compare the ERR and IRR as taken before in W5 blog for different beds occupancy with their discounted payback period for 15 years hotel operation.   

  1. Analysis and Comparison of the Alternative

As listed in Figure 3 above for selected IRR = 19% as mentioned in my W5 blog, the ERR rate value is quite close with it (around 18%). The payback period also close between 11-12 years operation time.  This means that actually the hotel tariff of 150 k-IDR refer to my fiend is true the baseline tariff for correspond Bank Jabar rate of 17% as my WACC. It most likely I have to revise the hotel tariff to 200 k-IDR per night with the same occupancy rate (73% bed occupancy per day), and the calculation with payback period present below:

Figure 5

Figure 5 Calculations for 23% Interest Rate (200 k-IDR Tariff per Night)

The result of 23% interest rate is quite interesting because I have seven years payback period which is lesser than previous interest rate.

  1. Selection of the Preferred Alternative

It most likely I will change my plan earlier. I will offer to the market the price of 200 k-IDR per night and I still believe that this price still in economic price also reachable by college students.     

  1. Performance Monitoring and the Post Evaluation of Result

Even I have changed the hotel price, my attention still focus on hotel occupancy per day because this is the variable element for this business. If necessary, probably I will lower the price for special days or provide family package price to attract more guest coming to my hotel.

References

[1]Simon Fraser University. (2008). Lecture 5 Comparison by Rate of Return. Retrieved from http://www2.ensc.sfu.ca/undergrad/courses/ENSC301/Unit05/lecture5.html-2008.

[2]Accountngexplained.com. (2012). Discounted Payback Period. Retrieved from http://accountingexplained.com/managerial/capital-budgeting/discounted-payback-period.

[3]Sullivan, William G., Wicks, Elin M., & C.Patrick, Koelling. (2012), Engineering Economy 15th Edition (pp. 205-211). New Jersey, United States: Prentice Hall.

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6 Comments

Filed under Arif P, Week 06

6 responses to “W6_APE_Low Cost Hotel Accommodation-LCHA, ERR & Payback Period

  1. AWESOME posting again, Pak Arif!! Love your case study and hope you are serious about this opportunity. (I would stay there!!!)

    What you might want to try would be to run a SENSITIVITY analysis to see which of the variables has the most impact on the outcome? You can do that from Engineering Economy or if you really want to get fancy, you could also do it using Palisade Precision Suite software I provided to you. Either way, that is yet another problem from Engineering Economy you can take credit for from your blog posting.

    Keep up the EXCELLENT example of leadership by example and am also very pleased to see that you have your word count down to 415 words, which is well within the specified limits!!!

    BR,
    Dr. PDG, Singapore

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