Development Of A Five Star Hotel Island Construction Essay

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This report has been prepared for Expedition Maldives Pvt. Ltd to evaluate the feasibility of investing in a project to develop a five star hotel island under the name of "Mendhoo Island Resort Development project" by using project development methods with financial assessment. This report has been structured with the project scope definition, scope management, financial analysis with a conclusion drown from the analysis following with the recommendation. Scope management has been developed with the project life cycle with required phases with works in each phase in detail. To analyze the project financially, Discounted Cash flow analysis, Net present value analysis and internal rate of return analysis has been used

Through this report, analysis has shown that investing in development of 100 room hotel is the most viable option for the Expedition Maldives Pvt. Ltd. The findings have shown that this project provides a good return since the internal rate of return of the project is higher than the required rate of return. Analysis on time value for money has also shown that it's significant to invest in this project. Properly executing all the phases of project life cycle is very important and any delay could incur extra costs since the cash inflow starts from third year, when the hotel is in operation. For this project its highly recommended for the responsible management team of the Expedition Maldives Pvt. Ltd to track, trace and monitor all activities of the project life cycle and make necessary amendment if requires on time for the successful accomplishment of the project.

1. Introduction

This report has been prepared for Expedition Maldives Pvt. Ltd to evaluate the feasibility of investing in a project to develop a five star hotel island under the name of "Mendhoo Island Resort Development project" by using project development methods with financial assessment.

For this project whether to invest in 50 or 100 rooms hotel is been assessed and investing in development of 100 room hotel has been chosen as the most viable option and analyzed in detail.

This report has been structured with the project scope definition, scope management, financial analysis with a conclusion drown from the analysis following with the recommendation. Scope management has been developed with the project life cycle with required phases with works in each phase in detail. To analyze the project financially, Discounted Cash flow analysis, Net present value analysis and internal rate of return analysis has been used.

2. Project Scope Management

2.1. Scope Definition

"Project Scope Management includes the process required to ensure that the project includes all the work required, and only the work required, to complete the project successfully".

(Turner, 1992)

The project scope definition document is mainly intended to endow with the project organization and the project manager with a road map of both the work to be completed within the estimated budget and time frame. It is a guide for future actions. Therefore, the scope document will be of an assistance to manage the project confidently and to maintain an effective communication process within the key stakeholders throughout the project.

Mendhoo Island Resort project is planned to develop a Five Star Hotel (a Resort Island), which requires a huge financial investment.

Tourism industry of Republic of Maldives is the fastest growing industry across the island nation and it is the major economic activity.

Before considering the lease agreement from the owner, The Board of Directors of Expedition Maldives Pvt. Ltd have done necessary environmental analysis and developed a strategic business plan based on the recent market research to assess the feasibility of investing on this project. With the positive outcomes, the top management of the organization decided to hire the island on a long term lease basis for a period of ten years, within that, two years period is targeted for the construction and the balance seven years for the Hotel business operation at its full swing.

The construction and development of the Hotel till its pre-opening is budgeted for US$ 8,000,000.00 (Eight million US Dollars). First activity of this project will be started with construction of Jetties, in order to aid and facilitate the unloading of required heavy load machineries and tools, material and other goods which is requisite to proceeding with the construction. Development phase of this project consists of 100 Guest Rooms (includes Beach Villas, Water Bungalows.

The other important activities of this project include carrying out all the other related works which are required for accomplishment of this project. Development works of the project would be carried out in accordance with the project charter and the approved design frame work. According to the project charter, the project scheduled to commence on July 2011 and to be completed on July 2013.

In regard with the all works, the company decided to hire skilled and qualified employees from related fields for the different areas of the total work to be done to accomplish the project. Project team of this project includes a project manager, Engineers and other functional department HOD's and other staffs.

apart from mentioned scope of the project, While continuing project if the need arises make amendments, that has to be considered in accordance with all the factors related to the project which includes budget, time frame and the quality of work.

2.2. Scope Management

The above Figure: 1 which is the life cycle of this project, adopted in order to manage the scope of the project .this will provide all the detail activities which are to be carried out for project to succeed.

Phase-1

Phase-2

Phase-3

Phase-4

Two years to complete the project

Monitoring and Controlling

Gate-1

Gate-2

Gate-3

Gate-4

Activities

1- Develop business case

2- Establish the terms of reference

3- Appoint the project team

4- Setup the project office

5- Review the phase

Activities

1- Project plan

2- Resource plan

3- Financial plan

4- Quality plan

5- Risk plan

6- Acceptance plan

7- Communication plan

8- Procurement plan

9- Contract the suppliers

10- Review the phase

Activities

1- Build deliverables

2- Monitor and control

3- Time management

4- Cost management

5- Quality management

6- Change management

7- Risk management

8- Issue management

9- Procurement management

10- Acceptance management

11- Communication management

12- Review the phase

Activities

1- Perform project closure

2- Review project completion

Activities

1- Current tourism market analysis

2-Envirnmental analysis

3- Feasibility study

4- Review the phase

Activities

1- Start operating island as a hotel

2- Checking the performance

Gate-5

Phase-5

Phase-6

Operation

Completion

Market Research

Carryout the project works

Initiation

Planning

Remaining eight years for operation

Figure : Project Life Cycle.

Life cycle of this project is consisting of six different phases with numbers of activities. The scopes of those activities are described below.

The first phase is market research of the product and service, starting from analyzing the Current tourism market.

Environmental analysis, to identify the risks associated with the project environment and to take possible action to mitigate the risk if required.

Feasibility study; collecting all the information of business problems and gathering required solution option to fix it, finding out the available solution option, evaluating feasibly for each option, identifying risk and issues associated with each option and developing suggested solution option for implementation.

Reviewing the phase is going to check all the requirements are identify and take proper action.

The first phase of this project is carrying out market research, before considering financial investment decision on this project, the company will be conducting researches to collect information regarding the trends in current tourism industry of the country as well as global market to identify the cost and benefit of investing the project, which will be followed by environmental analysis to identify the issues associated with project environment to take proper action before proceeding with a legal contract with the island owner.

Carrying out the feasibility of the project is also included in this phase by evaluating the current business problems and opportunities.

Project Initiation is the second phase of the life cycle. The scopes of activities included in this phase are as follows:

Develop a business case describing the opportunities, problems and issues which are exist and evaluating options to deliver solution and resolve the problems. This phase also includes cost and benefit associated with each solution option and recommended solution option for approval the business.

Establishing the terms of reference, define the project vision, objectives, scope and deliverables, identifying the roles and responsibilities of stakeholders and allocating resource and finance required in accordance with the plan.

Appointing project team, selecting qualified employees for appropriate positions is the most important function of the project.

Settings up the project office, to monitor and control the project environment and manage cultural diversity of workforce.

Review the phase, evaluation of achievement of this phase.

Considering Initiation phase of this project, finding out business opportunities of investing to build 100 rooms hotel and its operation, also identifying the environmental changes that might impact the project period and gathering required solution for those impacts. This phase also will identify the core aspect of business environment such as business vision, goal and objectives to be archived. This phase also will evaluate the process and technology available for the project.

Process and technologies that is relevant to the project, products and services.

legal requirements of government on environmental factors and commercial and operational trends which drives towards the business, the key stakeholders information and assuring the most appropriate methods of allocating required resources for the project to be finalized.

Appointing the project manager and allocating his responsibilities to proceed with selection of other team members necessary for carrying forward the project and allocating their responsibilities respectively. The final activity of this phase is building the project office to use the infrastructure as a base to manage project activities.

Iproject planning is the third phase of project life cycle. Scope of this phase includes:

Project plan: to identify the milestones, phases, activities and tasks to quantify the effort required. Allocating resources required and creating a project schedule including listing of the planning dependencies, assumptions and constraints.

Resource plan: identify and list out the general types of resources required and assigning the resources to the activities and complete the resources usage table.

Financial plan: to manage the costs and expenses likely to be inquired on the project such as employee's wages, equipment, materials and administration cost.

Quality plan: to maintain the terms of quality consider on the project and identify the targets to be met and describe the quality assurance and control techniques to be under taken.

Risk plan: identifying list of risks and rating the likelihood of each risks occurring, provide the report of impact and reason of occur and setting up the prevention action to reduce the likelihood of the risk occurring. Setting out a mitigation action plan to reduce the impact.

Acceptance plan: identify milestones to be archived and deliverables to be produced, developing what criteria and standards should be maintained for customer acceptance and reviewing the deliverables.

Communication plan, provide required information to the stakeholders to keep them regularly informed of the progress of the project status. Scheduling the communication

Events, methods and release dates, use matrix to highlight resources involved in each communication event and use clear process for each communication event with in the project.

Procurement plan, understanding of the external supply market and provide to key stakeholders with required materials and reliable details of suppliers to present the materials within the time and budget to proceed procurement in accordance with the company's procumbent policy

Contract the suppliers: conduct the tender process and evaluate the supplier and select appropriate supplier by looking ability and capability. Finally negotiating a formal contract with the preferred supplier.

Review the phase, reviewing to check if the activities are in accordance with the requirements.

Planning phase of this project is concerned on finding the milestones of project phases, number of activities and tasks to be complete within the particular timeframe, resource plan list out the required resources for the project such as employee, equipments and material. In this phase financial plan will identify the number of resources required and its related costs. Quality plan will provide the quality targets that should be archived. Risk plan is intended to emphasize the potential risks and what actions could be taken for mitigation of those risks. Acceptance plan is intended to list out the acceptance standard of the customer in regard with their expectations. Communication plan will describe what information is required and necessary to communicate with stakeholders. Procurement plan will identify a list of products and source of external suppliers which will be followed by the activity of contracting the suppliers after evaluating the best bidders.

Fourth phase of the life cycle is Carryout the project works. The scopes of this phase are:

Build deliverables, clearly define the objectives and deliverables, the final deliverable should meet the requirements of customers.

Monitor and control, physically constructing each deliverable and use series of management process to monitor and control the activities that are undertaken.

Time management, identify the total time required for each activity to complete the work on time and identify the percentage completed and outstanding works.

Cost management, identify the cost/expenses of overall project and accurately manage the record the details, approve and paid the payments on time.

Quality management, maintain the quality standard of the project according to the quality plan, using most appropriate quality measurement and techniques to measure the quality standards.

Change management, if any changes required to the project scope, deliverable, timescale or resources, should be evaluated and approved before implementation.

Risk management, use the best methods and theories to identify the risk associated with the project which includes quantifying, monitoring, avoiding, transferring and mitigating the risk with the help of risk register.

Issue management, use the appropriate method to identify the issue through the issue register and take number of action to reduce impact that the issue is having on the project.

Procurement management, to maintain the relationship with suppliers, monitor things that required and controlling the ordering receipt, review and approval of form suppliers, managing overall performance of the supplier.

Acceptance management, to check the deliverables are met with the customer requirements by presenting each deliverable separately until the acceptance of all the project deliverables.

Communication management, to provide right information at the right time to the correct stakeholders and should ensure the message is reached to the right person.

Carrying out the project works: This phase will provide with the final deliverables to the stakeholders. While carrying out the project works, deliverables would be checked on a regular interval to get the feedbacks from respective stakeholders before beginning every stage which would be done through monitory and controlling.

Each activity would be allocated with a particular time frame to meet deadlines. Variance has to be considered and adjusted if required and project scope should be discussed at managerial level for approvals. Risk management of the project should be carried out by recording in the project risk register to take necessary action for mitigation of the risk. In same manner other project issues also have to be registered in issue register to take required and needful actions. Procumbent of the project would be managed according to the procumbent plan, suppliers performance will be monitored are reviewed regularly.

Further, all necessary information relating to project has to be recorded and delivered accordingly to the respective parties timely.

Fifth phase of the life cycle is Completion; scopes of this phase are:

Perform project closure, to ensure from the stakeholders the deliverables are met with their acceptation and check project achieved the objectives and delivered the benefits describe in the business case.

Review project completion, to monitor achievements and failures of the project, to get better ideas for feature projects.

Completion, phase of this project will check and ensure the deliverables are delivered according to the stakeholder's expectation and project fully archived the objectives that are mentioned in the project scope and all the activities are review to identify the mistakes and errors to avoid in the feature projects.

The last phase of the project is operations of hotel scope are

Start operating island as a hotel, increasing the number of customers visiting on hotel providing quality standard services to them.

Checking the performance, maximize the revenue of the hotel.

Operation, phase of this project is to provide quality product and service customer to attract them to hotel and maintain their first choice holiday destination in Maldives and also yearly increasing the revenue of the company.

3. Financial Analysis of Project

3.1. Factors influences the choice of discount rate

Considering to this project factors influence to the choice of discount rate are interest rate and inflation. When discounted if the interest rate is higher the outcome of NPV (time) would lower and vice versa due to inverse relation.

Total Investment

Capital

Interest p.a.

Total money payment

Equity

8,000,000

14%

560,000

Total

8,000,000

560,000

Table : Cost of capital

The bank saving rate at bank of Maldives is 10% p.a. for fixed deposits and the bank lends long term loans at 15% interest (which is the cost of borrowing). The firm owners (shareholders) who have invested for equity capital, although they are not expecting any interest for the invested equity capital, they have expectations about the company's performance and return for the risk that they have taken instead of investing in the bank. They would be getting a 10% return p.a. which is even less risky. Therefore the expectation of the shareholders in regard with the return is higher, which is 14% p.a. as presented in the above table 1.0.

Therefore the while taking investment decision the company has to invest in such a way that fulfills the expectations of the shareholders in accordance with rate of return on their investment.

The company decided to invest in a project to build a five star hotel. Before considering this investment decision the company carried out initial feasibility studies to decide whether to invest in construction and operations of 100 rooms or 50. The main purpose feasibility this study is to identify the cost/ benefit of the project and to consider the investment which gives highest rate of return.

The following tables (table 2.0 and 3.0) provide the details of selection between two choices.

Expected cash inflow per year if invested in 50 rooms

Room Type

No of rooms

Expected occupancy per room p.a

Room Rate US$

Water Villa

25

180 days

450

Beach Villa

25

180 days

250

Total

 

Table : Expected cash inflow per year if invested in 50 rooms

Total project duration ten years

Construction and development requires one year.

Full board operation nine years

Expected duration to build and develop 50 room hotels requires one year. Operation will be started right after this period. Therefore this project totally consists of total ten years out of which nine years would be in full operations.

The total expected cash inflow of this project by the end of ten year is US$ 28,350,000 at the rate of US$ 3150000 cash inflow per year for nine years.

Expected cash inflow per year if invested in 100 rooms

Room Type

No of rooms

Expected occupancy per room p.a

Room Rate US$

Water Villa

50

180 days

450

Beach Villa

50

180 days

250

Total 

Table : Expected cash inflow per year if invested in 100 rooms

Total project duration ten years

Construction and development requires two year.

Full board operation eight years

Expected duration to build and develop 100 room hotels requires two year. Operation will be started right after this period. Therefore this project totally consists of total ten years, out of which eight years would be in full operations.

The total expected cash inflow of this project by the end of ten year is US$ 50,400,000.at the rate of US$ 6300,000 cash inflow per year for eight years.

Since investing in construction and operation of 100 rooms givers higher cash inflow than 50 rooms' hotel, the company decided to invest in construction and development of 100 rooms.

3.2. Discounted cash flow analysis

The management of the company evaluated the option of investing in the project for construction and development of 100 (hundred) Rooms which includes Beach villas and water bungalows. The details are stated below.

3.3. Net present value (NPV) analysis

Net present Value (NPV) represents the difference between the present vale (PV) of cash inflows and the Present value (PV) of cash outflows. Net Present Value is used to evaluate and analyze the profitability of this project since.

The Net Present Value of following projected cash flow is calculated   with consideration of amount and timing of future cash inflows, amount and timing of future cash outflows and by using discount rate (at the rate of 14%).

Project cash flow and Net Present Value(NPV)

Year

Net cash flows

0

-8000000

1

0

2

0

3

6300000

4

6300000

5

6300000

6

6300000

7

6300000

8

6300000

9

6300000

10

6300000

Net Present Value at 14%

Table : Project cash flow and Net Present Value (NPV)

3.4. Internal rate of return analysis

Internal rate of return is calculated to find the true rate of return earn on this investment over the course of 10 years life. The higher the project's internal rate of return, the more desirable to proceed with the product

Project cash flow and Internal rate of Return(IRR)

Years

Net cash flows

0

-8000000

1

0

2

0

3

6300000

4

6300000

5

6300000

6

6300000

7

6300000

8

6300000

9

6300000

10

6300000

Internal Rate of Return (IRR) = 21.185

Table : Project cash flow and Internal Rate of Return (IRR)

The Required Rate of Return (ROR) is 14% but the Internal Rate of Return (IRR) is 21.185% which means IRR is greater than ROR, and therefore project has to be preceded and carried forward.

Since IRR > ROR the project has to be preceded and carried forward.

4. Conclusions

Through this report, analysis has shown that investing in development of 100 room hotel is the most viable option for the Expedition Maldives Pvt. Ltd. The findings have shown that this project provides a good return since the internal rate of return of the project is higher than the required rate of return. Analysis on time value for money has also shown that it's significant to invest in this project. Properly executing all the phases of project life cycle is very important and any delay could incur extra costs since the cash inflow starts from third year, when the hotel is in operation.

The success depends on the ability of the project team to carry out the project work phases in accordance with the plan. If the project team is incompetent to carry out the planned work scheduled, it would be a countable threat to succeed the project

5. Recommendation

As mentioned under conclusion the project team of Expedition Maldives Pvt. Ltd should ensure all means to stay with the project plan but to meet and resolve any unexpected issues on timely basis. Since Maldives is a country geographically widespread, regular transfer of required materials should be well in advance prepared and the senior management of the project must be ready to face this challenge if arises at any phase of the project life cycle to accomplish the project on time. Delay in accomplishment is costly since no cash inflow is projected before the hotel is in operation. Therefore its highly recommended tracking, tracing and monitoring of all activities of the project life cycle and make necessary amendment if requires on time.

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