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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 ..............................................................................................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 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 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 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 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 1.1 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? 2 – Which method and how BITEXCO are applying to evaluate a project in reality? 3 - 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, 2 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 3 main chapters. Figure 1 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 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. 3 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. 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. 4 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. 5 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 2nd edition) 1.1.2. Project life cycle 6 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 7 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. 8 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.  Budget: All projects are constrained by limited monetary funding resources. Consequently, every project needs a budget to initially define its funding requirement. The project manager develops the budget based on the cost estimates 9 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: o Intangiblity o Inseparability o Heterogeneity o Perishability o Ownership 10 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 11 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 12 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 13 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, short14
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