UK Hotel Industry Investment and Brexit

The assignment provides an analysis of the UK hotel industry's investment trends from 2018 to 2020, focusing on the impact of Brexit on the market. It highlights the increase in investment in the hotel sector, with a significant portion coming from international investors. The document also discusses the demand for hotels during major events such as the NBA London Game and Cricket World Cup, which are expected to bring a large number of tourists to London.

Business Finance - BAFI3184
Investment Selection
Abstract
Employing a variety of capital investment evaluation techniques, including the Net Present Value
method, Internal Rate of Return, Payback Period method and Annualized Net Present Value
(Equivalent Annual Amount) to select the investment best suited for the company.
I. List sunk costs, side effects and opportunity costs for each capital investment
project and calculate the Net Cash Flows for each project.
Aura Investment is considering two projects in order to generate more profits for 20 to 25 years
from the time of the investment. New investment will replace firm’s current investment and is
expected to account for most of the firm’s profit.
Two investment projects are:
- 10-storey hotel apartment building in the heart of London, United Kingdom
- 15-storey hotel apartment building next to the beach in Da Nang, Vietnam.
 Sunk costs: are unavoidable and unrecovered costs, which incurred in the past and have
no influence on any ongoing projects in the future. (Kenton, 2018)
10-storey building London 15-storey building Da Nang
Sunk costs $1,000,000 on market research
 Side-effects of a capital investment project include ‘both positive (benefits) and negative
(costs) cash flows which result to other aspects of the business as a result of taking on current
business’
10-storey building London 15-storey building Da Nang

Side-effects
costs
 Additional costs for maintenance
Carpet: $100,000
Equipment: $200,000
Swimming pools: $50,000
 Total $350,000
(These costs are expected to increase
5% per year)
 Additional costs for maintenance
Carpet: $75,000
Equipment: $150,00
Swimming pools: $30,000
 Total $255,000
(These costs are expected to increase
6% per year).
 Additional wage costs:
$700,000 per year (Wages are
expected to rise 3.00% per year for
all staffs)
 Reduction wage costs:
$350,000 per year (Wages are
expected to rise 4.00% per year for
all staffs)
 Opportunity costs: are the benefits that individuals, investors or businesses have to give
up when they have to select one investment project over another one. (Kenton 2018)
10-storey building London 15-storey building Da Nang
Opportunity costs A forgone revenue of $5,000,000 per year from the current investment
 Net Cash Flows for each investment
- Calculation of depreciation: Aura Investment used straight-line depreciation method
for tax purposes. According to Larson (n.d.), companies depreciate their property such as
apartment buildings so as to create an annual deduction. This will lead to a reduction in net
income, therefore, reducing the amount of tax payment.
 Investment 1: 10-storey hotel apartment building in the heart of London, United Kingdom
2

Summary table Information Notes
Project cost 100,000,000.00$
Sold price 120,000,000.00$ Sell after 20 years
Book value -$
Revenue 9,000,000.00$ Increase of 5% per year for the next 20 years
Total additional costs for maintenance 350,000.00$ Rise 5% per year
Carpet 100,000.00$
Equipment 200,000.00$
Swimming pools 50,000.00$
Staffs wage 700,000.00$ Rise 3% per year
Working capital 1,000,000.00$
Required rate of return 13%
Tax rate 35%
Table 1. Summary information of London investment
- Depreciation = Cost price
Number of years
Depreciation
Using Straightline Depreciation method
Cost price 100,000,000.00$
Years of life 20
Depreciation 5,000,000.00$
Table 2. Depreciation of London investment
- Gain/Loss on Sale
Gain/loss on Sale
Book value at year 0 5,000,000.00$
Salvage value at year 0 80,000,000.00$
Gain on Sale 75,000,000.00$
Table 3. Gain/Loss on Sale of old investment
Gain/Loss on Sale
Book value at year 20 -$
Salvage value at year 20 120,000,000.00$
Gain on Sale 120,000,000.00$
3

Table 4. Gain/Loss on Sale of London investment
- Incremental revenue = Revenue in the expected project - Revenue of current investment
- Incremental wage cost = Wage cost of the expected project - Wage cost of current investment
(Calculation of Profit and Loss and Net Cash Flows are performed in Excel Worksheets)
Profit and Loss statement
Year 0 1 2 3 4 5 6 7 8 9
Incremental cash revenue 4,000,000.00$ 4,450,000.00$ 4,922,500.00$ 5,418,625.00$ 5,939,556.25$ 6,486,534.06$ 7,060,860.77$ 7,663,903.80$ 8,297,098.99$
Gain/loss on Sale 75,000,000.00$
Incremental costs for maintenance (350,000.00)$ (367,500.00)$ (385,875.00)$ (405,168.75)$ (425,427.19)$ (446,698.55)$ (469,033.47)$ (492,485.15)$ (517,109.41)$
Incremental wage cost (300,000.00)$ (301,000.00)$ (301,630.00)$ (301,858.90)$ (301,653.67)$ (300,979.23)$ (299,798.35)$ (298,071.54)$ (295,756.88)$
Depreciation cost (5,000,000.00)$ (5,000,000.00)$ (5,000,000.00)$ (5,000,000.00)$ (5,000,000.00)$ (5,000,000.00)$ (5,000,000.00)$ (5,000,000.00)$ (5,000,000.00)$
Taxable income 75,000,000.00$ (1,650,000.00)$ (1,218,500.00)$ (765,005.00)$ (288,402.65)$ 212,475.40$ 738,856.29$ 1,292,028.94$ 1,873,347.12$ 2,484,232.71$
Tax paid (35%) (26,250,000.00)$ 577,500.00$ 426,475.00$ 267,751.75$ 100,940.93$ (74,366.39)$ (258,599.70)$ (452,210.13)$ (655,671.49)$ (869,481.45)$
Income after tax 48,750,000.00$ (1,072,500.00)$ (792,025.00)$ (497,253.25)$ (187,461.72)$ 138,109.01$ 480,256.59$ 839,818.81$ 1,217,675.63$ 1,614,751.26$
Profit and Loss statement
Year 10 11 12 13 14 15 16 17 18 19 20
Incremental cash revenue 8,961,953.94$ 9,660,051.64$ 10,393,054.22$ 11,162,706.93$ 11,970,842.28$ 12,819,384.39$ 13,710,353.61$ 14,645,871.30$ 15,628,164.86$ 16,659,573.10$ 17,742,551.76$
Gain/loss on Sale 120,000,000.00$
Incremental costs for maintenance (542,964.88)$ (570,113.12)$ (598,618.78)$ (628,549.71)$ (659,977.20)$ (692,976.06)$ (727,624.86)$ (764,006.11)$ (802,206.41)$ (842,316.73)$ (884,432.57)$
Incremental wage cost (292,809.94)$ (289,183.61)$ (284,827.97)$ (279,690.09)$ (273,713.94)$ (266,840.17)$ (259,005.92)$ (250,144.67)$ (240,186.02)$ (229,055.45)$ (216,674.16)$
Depreciation cost (5,000,000.00)$ (5,000,000.00)$ (5,000,000.00)$ (5,000,000.00)$ (5,000,000.00)$ (5,000,000.00)$ (5,000,000.00)$ (5,000,000.00)$ (5,000,000.00)$ (5,000,000.00)$ (5,000,000.00)$
Taxable income 3,126,179.13$ 3,800,754.91$ 4,509,607.48$ 5,254,467.13$ 6,037,151.14$ 6,859,568.17$ 7,723,722.83$ 8,631,720.52$ 9,585,772.43$ 10,588,200.92$ 131,641,445.03$
Tax paid (35%) (1,094,162.69)$ (1,330,264.22)$ (1,578,362.62)$ (1,839,063.50)$ (2,113,002.90)$ (2,400,848.86)$ (2,703,302.99)$ (3,021,102.18)$ (3,355,020.35)$ (3,705,870.32)$ (46,074,505.76)$
Income after tax 2,032,016.43$ 2,470,490.69$ 2,931,244.86$ 3,415,403.63$ 3,924,148.24$ 4,458,719.31$ 5,020,419.84$ 5,610,618.34$ 6,230,752.08$ 6,882,330.60$ 85,566,939.27$
Table 5. Profit and Loss Statement of London investment
4

Cash flow statement
Year 0 1 2 3 4 5 6 7 8 9
Tax paid (35%) (26,250,000.00)$ 577,500.00$ 426,475.00$ 267,751.75$ 100,940.93$ (74,366.39)$ (258,599.70)$ (452,210.13)$ (655,671.49)$ (869,481.45)$
Incremental cash revenue 4,000,000.00$ 4,450,000.00$ 4,922,500.00$ 5,418,625.00$ 5,939,556.25$ 6,486,534.06$ 7,060,860.77$ 7,663,903.80$ 8,297,098.99$
Incremental costs for maintenance (350,000.00)$ (367,500.00)$ (385,875.00)$ (405,168.75)$ (425,427.19)$ (446,698.55)$ (469,033.47)$ (492,485.15)$ (517,109.41)$
Incremental wage cost (300,000.00)$ (301,000.00)$ (301,630.00)$ (301,858.90)$ (301,653.67)$ (300,979.23)$ (299,798.35)$ (298,071.54)$ (295,756.88)$
Salvage value 80,000,000.00$
Initial Outlay (100,000,000.00)$
Working capital (1,000,000.00)$
Net cash flows (47,250,000.00)$ 3,927,500.00$ 4,207,975.00$ 4,502,746.75$ 4,812,538.28$ 5,138,109.01$ 5,480,256.59$ 5,839,818.81$ 6,217,675.63$ 6,614,751.26$
Cash flow statement
Year 10 11 12 13 14 15 16 17 18 19 20
Tax paid (35%) (1,094,162.69)$ (1,330,264.22)$ (1,578,362.62)$ (1,839,063.50)$ (2,113,002.90)$ (2,400,848.86)$ (2,703,302.99)$ (3,021,102.18)$ (3,355,020.35)$ (3,705,870.32)$ (46,074,505.76)$
Incremental cash revenue 8,961,953.94$ 9,660,051.64$ 10,393,054.22$ 11,162,706.93$ 11,970,842.28$ 12,819,384.39$ 13,710,353.61$ 14,645,871.30$ 15,628,164.86$ 16,659,573.10$ 17,742,551.76$
Incremental costs for maintenance (542,964.88)$ (570,113.12)$ (598,618.78)$ (628,549.71)$ (659,977.20)$ (692,976.06)$ (727,624.86)$ (764,006.11)$ (802,206.41)$ (842,316.73)$ (884,432.57)$
Incremental wage cost (292,809.94)$ (289,183.61)$ (284,827.97)$ (279,690.09)$ (273,713.94)$ (266,840.17)$ (259,005.92)$ (250,144.67)$ (240,186.02)$ (229,055.45)$ (216,674.16)$
Salvage value 120,000,000.00$
Initial Outlay
Working capital 1,000,000.00$
Net cash flows 7,032,016.43$ 7,470,490.69$ 7,931,244.86$ 8,415,403.63$ 8,924,148.24$ 9,458,719.31$ 10,020,419.84$ 10,610,618.34$ 11,230,752.08$ 11,882,330.60$ 91,566,939.27$
Table 6. Cash Flow Statement of London investment
5

Table 7. Net Cash Flows of London investment
6

 Investment 2: 15-storey hotel apartment building next to the beach in Da Nang, Vietnam.
Summary table Information Notes
Project cost 150,000,000.00$
Under-the-table cost 500,000.00$
Total initial project cost 150,500,000.00$
Sold price 180,000,000.00$ Sell after 25 years
Book value -$
Revenue 8,500,000.00$ Increase of 5% per year for the next 25 years
Total additional costs for maintenance 255,000.00$ Rise 6% per year
Carpet 75,000.00$
Equipment 150,000.00$
Swimming pools 30,000.00$
Staffs wage 350,000.00$ Rise 4% per year
Working capital 2,000,000.00$
Required rate of return 15%
Tax rate 35%
Table 8. Summary information of the Da Nang investment
- Depreciation = Cost price
Number of years
Depreciation
Using Straightline Depreciation method
Cost price 150,000,000.00$
Years of life 25
Depreciation 6,000,000.00$
Table 9. Depreciation of Da Nang investment
- Gain/Loss on Sale
Gain/loss on Sale
Book value at year 0 5,000,000.00$
Salvage value at year 0 80,000,000.00$
Gain on Sale 75,000,000.00$
Gain/Loss on Sale of old investment
7

Gain/Loss on Sale
Book value at year 25 -$
Salvage value at year 25 180,000,000.00$
Gain on Sale 180,000,000.00$
Table 10. Gain/Loss on Sale of Da Nang investment
- Incremental revenue = Revenue of the expected project - Revenue of current investment
- Incremental wage cost = Wage cost of the expected project - Wage cost of current investment
(Calculation of Profit and Loss and Net Cash Flows are performed in Excel Worksheets)
Profit/Loss statement
Year 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Incremental cash revenue 3,500,000.00$ 3,925,000.00$ 4,371,250.00$ 4,839,812.50$ 5,331,803.13$ 5,848,393.28$ 6,390,812.95$ 6,960,353.59$ 7,558,371.27$ 8,186,289.84$ 8,845,604.33$ 9,537,884.54$ 10,264,778.77$ 11,028,017.71$ 11,829,418.60$
Gain/loss on Sale 75,000,000.00$
Incremenatal costs for maintenance (255,000.00)$ (270,300.00)$ (286,518.00)$ (303,709.08)$ (321,931.62)$ (341,247.52)$ (361,722.37)$ (383,425.72)$ (406,431.26)$ (430,817.13)$ (456,666.16)$ (484,066.13)$ (513,110.10)$ (543,896.71)$ (576,530.51)$
Incremental wage cost 50,000.00$ 56,000.00$ 62,440.00$ 69,347.60$ 76,752.00$ 84,684.11$ 93,176.60$ 102,264.05$ 111,983.01$ 122,372.15$ 133,472.35$ 145,326.82$ 157,981.25$ 171,483.93$ 185,885.88$
Depreciation cost (6,000,000.00)$ (6,000,000.00)$ (6,000,000.00)$ (6,000,000.00)$ (6,000,000.00)$ (6,000,000.00)$ (6,000,000.00)$ (6,000,000.00)$ (6,000,000.00)$ (6,000,000.00)$ (6,000,000.00)$ (6,000,000.00)$ (6,000,000.00)$ (6,000,000.00)$ (6,000,000.00)$
Taxable income 75,000,000.00$ (2,705,000.00)$ (2,289,300.00)$ (1,852,828.00)$ (1,394,548.98)$ (913,376.50)$ (408,170.13)$ 122,267.17$ 679,191.92$ 1,263,923.02$ 1,877,844.85$ 2,522,410.52$ 3,199,145.24$ 3,909,649.92$ 4,655,604.93$ 5,438,773.97$
Tax paid (35%) (26,250,000.00)$ 946,750.00$ 801,255.00$ 648,489.80$ 488,092.14$ 319,681.77$ 142,859.55$ (42,793.51)$ (237,717.17)$ (442,373.06)$ (657,245.70)$ (882,843.68)$ (1,119,700.83)$ (1,368,377.47)$ (1,629,461.73)$ (1,903,570.89)$
Income after tax 48,750,000.00$ (1,758,250.00)$ (1,488,045.00)$ (1,204,338.20)$ (906,456.84)$ (593,694.72)$ (265,310.59)$ 79,473.66$ 441,474.75$ 821,549.96$ 1,220,599.15$ 1,639,566.84$ 2,079,444.40$ 2,541,272.45$ 3,026,143.21$ 3,535,203.08$
Profit/Loss statement
Year 16 17 18 19 20 21 22 23 24 25
Incremental cash revenue 12,670,889.52$ 13,554,434.00$ 14,482,155.70$ 15,456,263.49$ 16,479,076.66$ 17,553,030.49$ 18,680,682.02$ 19,864,716.12$ 21,107,951.93$ 22,413,349.52$
Gain/loss on Sale 180,000,000.00$
Incremenatal costs for maintenance (611,122.34)$ (647,789.68)$ (686,657.06)$ (727,856.48)$ (771,527.87)$ (817,819.55)$ (866,888.72)$ (918,902.04)$ (974,036.16)$ (1,032,478.33)$
Incremental wage cost 201,241.04$ 217,606.40$ 235,042.15$ 253,611.91$ 273,382.87$ 294,425.98$ 316,816.21$ 340,632.71$ 365,959.06$ 392,883.52$
Depreciation cost (6,000,000.00)$ (6,000,000.00)$ (6,000,000.00)$ (6,000,000.00)$ (6,000,000.00)$ (6,000,000.00)$ (6,000,000.00)$ (6,000,000.00)$ (6,000,000.00)$ (6,000,000.00)$
Taxable income 6,261,008.23$ 7,124,250.72$ 8,030,540.79$ 8,982,018.92$ 9,980,931.65$ 11,029,636.93$ 12,130,609.51$ 13,286,446.79$ 14,499,874.82$ 195,773,754.71$
Tax paid (35%) (2,191,352.88)$ (2,493,487.75)$ (2,810,689.28)$ (3,143,706.62)$ (3,493,326.08)$ (3,860,372.93)$ (4,245,713.33)$ (4,650,256.38)$ (5,074,956.19)$ (68,520,814.15)$
Income after tax 4,069,655.35$ 4,630,762.97$ 5,219,851.52$ 5,838,312.30$ 6,487,605.58$ 7,169,264.00$ 7,884,896.18$ 8,636,190.41$ 9,424,918.64$ 127,252,940.56$
Table 11. Profit and Loss statement of Da Nang investment.
8

Cash flow statement
Year 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14
Tax paid (35%) (26,250,000.00)$ 946,750.00$ 801,255.00$ 648,489.80$ 488,092.14$ 319,681.77$ 142,859.55$ (42,793.51)$ (237,717.17)$ (442,373.06)$ (657,245.70)$ (882,843.68)$ (1,119,700.83)$ (1,368,377.47)$ (1,629,461.73)$
Incremental cash revenue 3,500,000.00$ 3,925,000.00$ 4,371,250.00$ 4,839,812.50$ 5,331,803.13$ 5,848,393.28$ 6,390,812.95$ 6,960,353.59$ 7,558,371.27$ 8,186,289.84$ 8,845,604.33$ 9,537,884.54$ 10,264,778.77$ 11,028,017.71$
Incremental costs for maintenance (255,000.00)$ (270,300.00)$ (286,518.00)$ (303,709.08)$ (321,931.62)$ (341,247.52)$ (361,722.37)$ (383,425.72)$ (406,431.26)$ (430,817.13)$ (456,666.16)$ (484,066.13)$ (513,110.10)$ (543,896.71)$
Incremental wage cost 50,000.00$ 56,000.00$ 62,440.00$ 69,347.60$ 76,752.00$ 84,684.11$ 93,176.60$ 102,264.05$ 111,983.01$ 122,372.15$ 133,472.35$ 145,326.82$ 157,981.25$ 171,483.93$
Salvage value 80,000,000.00$
Initial Outlay (150,500,000.00)$
Working capital (2,000,000.00)$
Net cash flows (98,750,000.00)$ 4,241,750.00$ 4,511,955.00$ 4,795,661.80$ 5,093,543.16$ 5,406,305.28$ 5,734,689.41$ 6,079,473.66$ 6,441,474.75$ 6,821,549.96$ 7,220,599.15$ 7,639,566.84$ 8,079,444.40$ 8,541,272.45$ 9,026,143.21$
Cash flow statement
Year 15 16 17 18 19 20 21 22 23 24 25
Tax paid (35%) (1,903,570.89)$ (2,191,352.88)$ (2,493,487.75)$ (2,810,689.28)$ (3,143,706.62)$ (3,493,326.08)$ (3,860,372.93)$ (4,245,713.33)$ (4,650,256.38)$ (5,074,956.19)$ (68,520,814.15)$
Incremental cash revenue 11,829,418.60$ 12,670,889.52$ 13,554,434.00$ 14,482,155.70$ 15,456,263.49$ 16,479,076.66$ 17,553,030.49$ 18,680,682.02$ 19,864,716.12$ 21,107,951.93$ 22,413,349.52$
Incremental costs for maintenance (576,530.51)$ (611,122.34)$ (647,789.68)$ (686,657.06)$ (727,856.48)$ (771,527.87)$ (817,819.55)$ (866,888.72)$ (918,902.04)$ (974,036.16)$ (1,032,478.33)$
Incremental wage cost 185,885.88$ 201,241.04$ 217,606.40$ 235,042.15$ 253,611.91$ 273,382.87$ 294,425.98$ 316,816.21$ 340,632.71$ 365,959.06$ 392,883.52$
Salvage value 180,000,000.00$
Initial Outlay
Working capital 2,000,000.00$
Net cash flows 9,535,203.08$ 10,069,655.35$ 10,630,762.97$ 11,219,851.52$ 11,838,312.30$ 12,487,605.58$ 13,169,264.00$ 13,884,896.18$ 14,636,190.41$ 15,424,918.64$ 135,252,940.56$
Table 12. Cash Flows statement of Da Nang investment
9

Table 13. Net Cash Flows of Da Nang investment
10

II. Valuation Methods
 Investment 1: 10-storey hotel apartment building in the heart of London, United Kingdom
Payback period
Table 14. Payback Period of London investment
Payback period = the last period with negative cash flow (year 9) +
Accumulated cash flow of year 9(absolute value)
Net cash flow of year 10
= 9 + 508,628.68
7,032,016.43 = 9.07 (years)
11

Year Net Cash Flows Accumulated cash flow
0 (47,250,000.00)$ (47,250,000.00)$
1 3,927,500.00$ (43,322,500.00)$
2 4,207,975.00$ (39,114,525.00)$
3 4,502,746.75$ (34,611,778.25)$
4 4,812,538.28$ (29,799,239.97)$
5 5,138,109.01$ (24,661,130.97)$
6 5,480,256.59$ (19,180,874.38)$
7 5,839,818.81$ (13,341,055.57)$
8 6,217,675.63$ (7,123,379.94)$
9 6,614,751.26$ (508,628.68)$
10 7,032,016.43$ 6,523,387.75$
11 7,470,490.69$ 13,993,878.44$
12 7,931,244.86$ 21,925,123.31$
13 8,415,403.63$ 30,340,526.94$
14 8,924,148.24$ 39,264,675.18$
15 9,458,719.31$ 48,723,394.49$
16 10,020,419.84$ 58,743,814.33$
17 10,610,618.34$ 69,354,432.67$
18 11,230,752.08$ 80,585,184.75$
19 11,882,330.60$ 92,467,515.35$
20 91,566,939.27$ 184,034,454.62$
Initial outlay (47,250,000.00)$
Required rate of return 13%
Payback Period 9.07
Net Present Value 1,831,832.51$
Internal rate of return 13.4%
EAA 260,768.30$
Table 15. Internal Rate of Return, Net Present Value and Annualized Net Present Value of
London investment
Internal Rate of Return
12

Net Present Value
Annualized Net Present Value
Calculated using the formula of the present value of ordinary annuity
PV = PMT [ 1−(1+r )−n
r ]
or NPV = EAA [ 1−(1+r )−n
r ]
$ 1,831,832.51 = EAA [ 1−(1+0.13)−20
0.13 ]→ EAA =
1,831,832.51
[ 1−(1+0.13)−20
0.13 ] = $ 260,768.30
All calculations of Payback Period, Internal Rate of Return, Net Present Value and Annualized
Net Present Value are performed in Excel Worksheets.
13

 Investment 2: 15-storey hotel apartment building next to the beach in Da Nang, Vietnam.
Payback period
Year Cash flow Accumulated Cash Flow
0 (98,750,000.00)$ (98,750,000.00)$
1 4,241,750.00$ (94,508,250.00)$
2 4,511,955.00$ (89,996,295.00)$
3 4,795,661.80$ (85,200,633.20)$
4 5,093,543.16$ (80,107,090.04)$
5 5,406,305.28$ (74,700,784.76)$
6 5,734,689.41$ (68,966,095.34)$
7 6,079,473.66$ (62,886,621.68)$
8 6,441,474.75$ (56,445,146.93)$
9 6,821,549.96$ (49,623,596.97)$
10 7,220,599.15$ (42,402,997.81)$
11 7,639,566.84$ (34,763,430.98)$
12 8,079,444.40$ (26,683,986.58)$
13 8,541,272.45$ (18,142,714.12)$
14 9,026,143.21$ (9,116,570.92)$
15 9,535,203.08$ 418,632.16$
16 10,069,655.35$ 10,488,287.51$
17 10,630,762.97$ 21,119,050.48$
18 11,219,851.52$ 32,338,902.00$
19 11,838,312.30$ 44,177,214.29$
20 12,487,605.58$ 56,664,819.87$
21 13,169,264.00$ 69,834,083.87$
22 13,884,896.18$ 83,718,980.05$
23 14,636,190.41$ 98,355,170.47$
24 15,424,918.64$ 113,780,089.10$
25 135,252,940.56$ 249,033,029.66$
Initital Outlay (98,750,000.00)$
Required rate of return 15%
Payback Period 14.96
Table 16. Payback Period of Da Nang investment
14

Payback period = the last period with negative cash flow (year 14) +
Accumulated cash flow of year 14(absolute value)
Net cash flow of year 15 = 14 + 9,116,570.92
9,535,203.08 = 14.96 (years)
Year Cash flow Accumulated Cash Flow
0 (98,750,000.00)$ (98,750,000.00)$
1 4,241,750.00$ (94,508,250.00)$
2 4,511,955.00$ (89,996,295.00)$
3 4,795,661.80$ (85,200,633.20)$
4 5,093,543.16$ (80,107,090.04)$
5 5,406,305.28$ (74,700,784.76)$
6 5,734,689.41$ (68,966,095.34)$
7 6,079,473.66$ (62,886,621.68)$
8 6,441,474.75$ (56,445,146.93)$
9 6,821,549.96$ (49,623,596.97)$
10 7,220,599.15$ (42,402,997.81)$
11 7,639,566.84$ (34,763,430.98)$
12 8,079,444.40$ (26,683,986.58)$
13 8,541,272.45$ (18,142,714.12)$
14 9,026,143.21$ (9,116,570.92)$
15 9,535,203.08$ 418,632.16$
16 10,069,655.35$ 10,488,287.51$
17 10,630,762.97$ 21,119,050.48$
18 11,219,851.52$ 32,338,902.00$
19 11,838,312.30$ 44,177,214.29$
20 12,487,605.58$ 56,664,819.87$
21 13,169,264.00$ 69,834,083.87$
22 13,884,896.18$ 83,718,980.05$
23 14,636,190.41$ 98,355,170.47$
24 15,424,918.64$ 113,780,089.10$
25 135,252,940.56$ 249,033,029.66$
Initital Outlay (98,750,000.00)$
Required rate of return 15%
Payback Period 14.96
Net Present Value (54,172,083.59)$
Internal rate of return 7.8%
EAA (8,380,388.95)$
15

Table 17. Internal Rate of Return, Net Present Value and Annualized Net Present Value of Da
Nang investment
Internal Rate of Return
Net Present Value
Annualized Net Present Value
Calculated using the formula of the present value of ordinary annuity:
PV = PMT [ 1−(1+r )−n
r ]
or NPV = EAA [ 1−(1+r )−n
r ]
$ (54,172,083.59) = EAA [ 1−(1+0.15)−25
0.15 ]→ EAA =
(54,172,083.59)
[ 1−(1+0.15)−25
0.15 ] = $ (8,380,388.95)
All calculations of Payback Period, Internal Rate of Return, Net Present Value and Annualized
Net Present Value are performed in Excel Worksheets.
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III. Decision on the most suitable investment
Table 18. Valuation methods calculation of London investment
Table 19. Valuation methods calculation of Da Nang investment
From the above calculation, the best selection of investment for Aura Investment is building a
10-storey hotel apartment building in the heart of London.
 Explanation
1. Net present value: According to Kenton (2018), net present value is a useful method in
capital budgeting and investment to measure the profitability of an investment project. Net
present value is the difference between the present value of future cash outflows and the present
value of future cash inflows. A positive net present value implies that the anticipated earnings
generated from a project exceed the anticipated costs, meaning that the investment is profitable.
Conversely, negative net present value indicates a loss. Therefore, only investment with positive
net present value should be considered. Net Present Value method is the best alternative as it
takes into account the time value of money and also works efficiently in the case of unknown
project’s discount rate (Gallant 2018).
London Investment has a positive net present value ($ 1,831,832.51), while Da Nang investment
has a negative net present value ($ (54,172,083.59)), therefore, investment project in London
should be undertaken.
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2. Payback period: According to Kagan (2019), payback period method refers to a length of
time that investment takes to generate positive cash flows which ‘pay back’ the initial
investment. Investors and managers consider an investment attractive if it has shorter payback
period. This method is simple however not the best efficient since it does not take into account
the time value of money.
The investment in London has a short payback period (9.07 years), while investment in Da Nang
has a longer payback period (14.96 years). Therefore, London investment is a better selection.
3. Internal Rate of Return (IRR): According to Hayes (2019), IRR is a metric in capital
budgeting and investment planning to evaluate the profitability of ongoing investment. The
internal rate of return (the time-adjusted rate of return) is the expected percentage of return on a
firm’s capital investment projects. If IRR of a project is greater than the benchmark rate, that
project will be accepted. If IRR of a project is lower than the benchmark rate, that project will be
rejected. Projects with higher IRR are considered the best and should be undertaken.
The internal rate of return for London investment is 13.4%, which is higher than the required rate
of return (13%). Therefore, the project is accepted. However, investment in Da Nang has only
7.8% internal rate of return, which is lower than the required rate of return (15%), hence, this
project is rejected.
4. Annualized Net Present Value (Equivalent Annual Amount): this value is calculated
using the annuity approach to measure the constant cash flow generated from an investment
project. Projects with a higher ANPV should be undertaken. (Kagan 2019). Project in London
has positive Annualized Net Present Value ($ 260,768.30), while project in Da Nang has
negative Annualized Net Present Value ($ (8,380,388.95)). Obviously, the project in London will
be chosen.
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NPV calculates the gap between the present value of cash inflows over a period of time and the
present value of cash outflows (Kenton 2019). A positive figure indicates that the income
generating from the investment exceeds the attribute cost, meaning that the investment can bring
profits. For that reason, a higher NPV shows a more profitable outcome that an investment can
brings. Additionally, since this method consider both the cash outflow and discount rate, it makes
up for the two aforementioned methods.
Taking the two initiatives into account, it implies that Digital Marketing plans can be more
profitable than the other option since its NPV is higher ($11,256,990>$10,026,553).
IV. Additional factors contributing to the decision
Aside from the figures calculated, there are some external factors that impact the chosen
investment project.
1. Geographical location: the project is in the heart of London, which is the capital of the
UK.
- According to Bookmundi (2016), London ranks top in the b world as the best city to
visit. Illustratively, London is the location of many famous historical sites that attract an
enormous number of visitors annually. One of the most significant features of London is Thames
River. Thames River is the longest river in the country with 346 km. From the Thames River,
tourists have golden opportunities to explore other iconic landmarks of the UK, including the
London Eye, Tower Bridge, The London Tower or Buckingham Palace. Every year, the river
attracts around 8 million passengers on night cruise, sight -seeing vessels, commuter ferries or
other commercial boats for pleasure. Also, there are at least 23 million tourists visiting popular
attractions situated along the Thames River (Oxford Economics, 2015)
Also, the geographical of London is advantageous. Standing next to the Europe’s mainland,
between the America and Asia, London has its time-zone overlap with many regions including
New York, Frankfurt, Hong Kong or Singapore, which benefits businesses and tourists.
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In addition to historical attractions, being the symbol of world fashion brings numerous tourists
to London. Specifically, the most prestigious and influential event of this city is London Fashion
Week with the attendance of many supermodels and celebrities, attracting millions of journalists
and visitors from all around the world annually.
- London is also an ideal city for doing business.
The first reason is highly-qualified and young workforce. A third of England citizens move to
London for the completion of higher education degrees; 24% of London inhabitants aged from
25 to 34 years old. Therefore, enterprises in London can easily employ skilled and passionate
professionals to contribute to the business operation and growth. Also, London inhabitants are
from diverse background and ethnic, which provides a great assistance to delivering services to
different customers segments.
Top-ranked transportation infrastructure serves as a contributing factor to a wider base of
customer in London. With six international airports, 10 ground transport hubs and extensive
underground system, London has a huge capability to provide service to millions of potential
tourists inside the city, across the U.K and all around the world. (Entrepreneur 2018)
- On the other hand, Da Nang, known as the best place to live in Vietnam, is also a
potential tourism spot. However, compared to London, Da Nang is not able to attract that huge
number of tourists. Location near the sea is advantageous for Da Nang, but also a drawback.
Natural disasters from the sea such as cyclone or hurricane can be great dangers to visitors and
residents. Moreover, the development of services such as restaurants, guest houses or shopping
centers does not achieve high standard; they are quite chaotic and uncontrollable, which causes
discomfort to tourists. Also, traffic and accommodation infrastructure innovation in Da Nang is
still slow and insufficient to meet the increasing demand from the rising number of foreign
visitors to the city. (Business Study 2017)
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2. Current and future macroeconomics
● Investment
Recently, capital investment in travel and tourism in UK is forecasted to increase over time
Figure 1. Capital investment in the travel and tourism industry in the United Kingdom from
2012 to 2028 (Statista 2019)
In 2018, investment in UK hotel industry increased unprecedentedly, reaching £7.4 billion-a £1.7
billion and 29% increase on a yearly basis. A global property adviser Knight Frank points out
that 50% of the investment was international. Overseas investors poured £4.9 billion into the UK
hotel industry. European investment accounts for 27% (£2 billion) with £1.6 billion from France;
21% (£1.5 billion) of the investment originated from the US because of ‘significant institutional
interest’. Investors from the UK occupied a third of the total investment with £2.5 billion.
Particularly, the capital city-London remains to be the most attractive as a world-class
destination for leisure and business travel with total investment reaching £3.3 billion. Hotel
21

acquisitions and hotel projects funding equated to 21%. The key driving force of the hotel capital
market is foreign investment, which accounts for £2.4 billion of the total investment.
Because of prolonged Brexit negotiations, a demand for long-term and secured assets increases
considerably, contributing to rising investment in hotel sector. UK investors are now regarding
specialist sector such as hotels real estate very attractive for the next decade. Capital flows and
institutional investment will remain resistant due to emerging emphasis placed on specialist
sector investment strategy, leading to over £1.1billion invested in hotel expansion and funding
for new hotel brands opening in London market.
In 2019, being the world’s most liquid real estate with long-term growth prospects, London has a
total 259 deals and total transaction volumes reaching US$ 23 million. Therefore, the capital will
still be a hotspot for both domestic and international investment. (Price 2019)
3. Political event (Brexit)
UK is negotiating its Brexit, which leads to weakened pound. A double-digit decrease in pound
value against Euro and Dollar is a pulling power to make UK one of the most popular tourism
destination. In 2018, the number of overseas visitors passed 41 million, with total spending up to
£27 billion. Tourists predominately coming from Europe, China and the U.S.to purchase items
from luxury brands with a lower price. Tourists boom promoted strong sales for luxury goods,
making Bond Street in London surpass Paris’s Champs-Élysées as one of the world’s most
expensive store locations. Hotels and restaurants in London, Edinburgh or Cambridge has
undergone their record periods.
Hotels in London witnesses an increase in room yield by 4%; occupancy level also rose by 3.7%,
achieving the highest record at 83.6%. These positive figures highlight the resilience of London
hotel market against political turbulence from Brexit and its capacity to absorb new expansion
with approximately 8,000 rooms opening (Brignall 2018)
In 2019, UK hotel performance will remain strong with anticipated upturn of 1 million tourists.
The hotel market in the UK will remain very attractive to investors. With increasing volume of
M&A transactions and new pipeline of new hotels, there will no expected major shocks to the
market despite Brexit, according to Robert Barnard - partner at BDO accountancy and business
advisory firm (BDO United Kingdom 2019)
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4. Highlighting events
● In January 2019, the National Basketball Association London Game was organized in the
O2 Arena, attracting global attention and becoming a long season stop for many players. In
addition, English and Wales are the host of the Cricket World Cup in July in 2019. In London,
there are five games in Ovals and Lords with the finale at Lords Cricket Ground on 14th July.
These events will bring an enormous number of tourists to London, boosting the demand for
hotels
● Also, the Europe’s largest railway infrastructure project - Crossrail will be completed and
open in 2019, bringing an estimated 1.5 million people to the central of London. The railway
will make it easier to access the key employment, entertainment and business districts of
London, which will support hotel demand. (Skelton 2019)
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