CASE STUDY-PAPHOS HOLIDAY COMPLEX

Introduction:

The Case Study explains feasibility study of Paphos Holiday Complex in Cyprus. It covers all
aspects of market, financial, economic, sensitivity, risk as well as environment .The project is
sponsored by the Cyprus Development Board (CDB).In the Introduction section overall growth
of tourism is discussed. Majority of the tourists arriving in Cyprus are from Western Europe and
of “mass tourist type”. Although tourism business is the boosting parameter of the economy of
Cyprus, The government has decided to improve the quality rather than the expansion. The
expansion of the business would cause serious environmental imbalance. Paphos is intended to
be a quality holiday resort and they will be concentrating on upper class segment.

Market Analysis

The market analysis was carried out keeping in view the market growth & bed capacity,
seasonality and occupancy rates of the existing hotels. Paphos is very popular among tourists and
have high occupancy rates due to mild climate, historical monuments and international airport.
Study regarding existing competitors and new entrants was also carried out. For the analysis,
existing 4 five star hotels in Cyprus area were considered as competitors.

Type of tourists on which the project will focus is mentioned in the report and facilities are
provided based on the target visitors. The features of the hotel are decided for keeping
international standards. The project is expected to out-perform its immediate competitors by
superior quality and effective management. The only disadvantage of being away from the town
could be mitigated by providing bus services to the customers.

Financial Plan

The project is expected to be completed at a cost 19.2 million Cyprus Pound. The cash flow
statement for the invested money is prepared and then the cash flows are discounted by 11.4% to
obtain +ve NPV of 1.75 million. The cash flow statement shows that the project will be
comfortably repay its loan and leave a surplus to its owners every year. The expected domestic
inflation is taken as 5% per year. Loans from local (2 million CP) and foreign banks (9 million
CP) were taken at the interest rates of 9% and 10.5% respectively. Economic life of building,
electrical works and furnishing works is taken as 45, 15 and 12 years respectively.

The cost of permanent staff and temporary staff is considered as CP420 and CP220 respectively.
The number of permanent staff would be 370 and number of temporary staff would be depending
upon the hotel occupancy during peak season. The project will be subjected to three types of
taxes: corporate tax, special contribution and defense levy.

Economic Evaluation

Two adjustments are to be made to make the financial cash flows economic. The first adjustment
involves taking into account the benefits to the economy arising from the incremental guest
nights. The second adjustment is to include two benefits that are not included in the hotel
account: the taxes paid by the tourists and benefits due to tourists spending outside the hotel. The
discount rate used in economic evaluation was based on the social opportunity cost of public
fund approach. The discount rate was estimated to be 9.5% using the data on supply and demand
of funds in Cyprus. The economic evaluation employs a number of conversion factors such as
electricity conversion factor to make financial cash flows economically viable.

Distributional Analysis:

A project generates externalities when its inflows and outflows differ from their respective
economic values. In distributional analysis one can know who would be gaining or loosing from
the existing project. There are four types of externalities mentioned in this report.

 Not including income in the financial statements which may be generated by the project.
 Non- incrementality of the project’s cash flow to the economy.
 Difference between financial inputs and outputs of the project with there economic
values.
 Premium on foreign exchange which the project is credited and/or charged with the
amount of foreign exchange.

The main beneficiary of the externalities generated by the project is the government because it
receives all the taxes paid by tourists, corporate tax and premium on foreign exchange.

Sensitivity Analysis:

It was carried out to observe the impact of changes in key variables on the financial statement.
The variables tested were domestic inflation rate, project cost, hotel occupancy, hotel revenues
per guest and the number of guest nights considered incremental to the economy.

Risk Analysis:

The variables tested for risk analysis are the ones who have a high impact on project. These
parameters are revenues earned per guest, occupancy levels, project costs and staff costs.

Environmental Consideration:

The issues reviewed for environmental impacts are as under:

Land Values: Increase in land value due to implementation of the project would lead to
economic benefits.

Traffic Congestion: The hotel facility may create traffic congestion problems which may be
resulted into environmental pollution and loss of working time due to delay. This problem is not
evident in this project as there is a sufficient capacity road network is available in the vicinity of
the site.

Road Pavement Damage:

The additional traffic generated by the project may create some damage to the road pavement but
its effect will be nominal.

Waste water pollution:

The hotel will be treating the waste water and will use the treated water for irrigation of gardens
of the hotel. There will not be any waste disposal in sea.

Noise Pollution: Due to high amount of space available and remote location, effects of noise
pollution is not evident.

Change of landscape: There will be a positive impact due to landscaping.

Change of the water front: A beach will be prepared for bathing as per beach improvement
plan.

Access to the beach: A path for pedestrians will be provided to overcome this problem.

Loss of view: Care is taken while designing to create buildings that would blend with the
environment and be aesthetically appealing.

The cost due to environment enhancement can be taken care by just increasing the hotel rate by
3%.So net effect of environment enhancement is positive.

Conclusion

The Paphos hotel project seems to be superior in all aspects with respect to other competitors due
to their effective market and management strategies. The hotel includes all the features keeping
in mind the upper class tourists from Western Europe. The project will generate satisfactory
revenue and will boost the economy. The appraisal is viable in all financial, economic and
environmental aspects.