INVESTMENT APPRAISAL

Pampers Health Spa (PHS)



Abstract

Pampers Health Spa (PHS) is considering two business ideas for the purpose of expansion. First one is the development of the leisure complex which includes a swimming pool, sauna and steam rooms. Second alternative is to develop a meetings and conference centre with the capacity to accommodate 10 delegates at a time. This report evaluates both the alternatives with the help of different investment appraisal methods. Moreover, various internal and external business factors are taken into account for the appraisal of the two proposals.

Pampers Health Spa (PHS)

Overview

Pampers Health Spa (PHS) is provided Spa and Hotel services to business corporate and travellers. It is located in a rural area, 10 miles from Birmingham city centre. The company is operating a highly competitive market with two rival hotels within 20 miles of PHS. PHS has the capacity of accommodating 420 guests per week. However, it is only utilising 70 % of its capacity. The Spa hotel has the reputation of providing high quality services to its guests. The hotel has a bar, breakfast and restaurant areas. The bar provides is an ideal place for meeting or entertainment purpose. The company procures the raw material from a local wholesaler on thirty days credit.

Financial Analysis of PHS

Financial statements of Pampers Health Spa, attached in Appendix: Table 1 and Table 2, portray a good financial health of the company. The company has maintained an attractive level of Net profit margin and gross profit margin. Moreover, the management has been successful in controlling the cost of services. However, the fixed assets turnover can be improved. The company is utilising 70% of its capacity at present. The marketing team should attract more and more guests to make full utilisation of the fixed assets. This will also increase the sales at the same level of fixed cost.

Proposed Alternatives

The company is analysing two proposals for the purpose of investment, with the expectation of enhancing the demand and profit levels. Apparently, both options seem to be lucrative. However, the company has enough funds to invest in one project only.

Proposal 1: Leisure Complex

PHC is planning to develop a leisure complex that includes a swimming pool, sauna and steam rooms within its existing grounds. The will require an initial cost of £900,000.

Proposal 2: Meetings and Conference Centre

The company is considering the option of developing a small meetings and conference centre and dormitory style accommodation with the capacity to cater 10 delegates at a time. The development will be housed in an existing outbuilding that will require extensive refurbishment. The initial cost will be £750,000.

Investment Appraisal Methods

Three investment appraisal methods were used to select one of the proposals. These include Net present value (NPV), Payback period, and Accounting rate of return (ARR). The calculations are attached in Appendix: Table 3 and Table 4. Before analysing the results and making decision, it is important to review the basic concept of these methods, along with their limitations and interpretations.

NPV

It is the most widely used method by the academicians, investors and ...