by Kimberly A. Ishi, Terrance Jalbert, and Mercedes Jalbert


peer-reviewed article Kimberly A. Ishi is a student at the University of Hawaii at Hilo. Terrance Jalbert is an Associate Professor of Finance, University of Hawaii at Hilo. Mercedes Jalbert  is the Owner of Jayco Travel and Tours of Hilo, Hawaii. 


This paper is a venture capital case study of Pacifica Holdings LLC. Pacifica Holdings LLC, a venture capital firm, is considering funding a venture called the Aqua Resort and Casino. Pacifica Holdings LLC will break political barriers with its flagship property as the exclusive recipient of Hawaii’s first gambling license. The Aqua Resort and Casino will be situated on a premier 100- acre property at Ko’Olina on the Island of Oahu. Pacifica Holdings LLC has planned a minimum initial investment of $1.3 billion.  Financial information regarding the proposal is provided in the case. The project is to complete a capital budget to determine if the project is a feasible and desirable venture.  Comment on the proposal and suggested modifications that might increase the chances of success are also requested.  The timing of each cash flow is carefully identified in the case so speculation is not required to complete the analysis.   

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Today is January 1, 2003. Pacifica Holdings LLC is a venture capital company that has considerable resources available for investment. Its aim is to fund enterprises that offer the prospect of sizable profits.  Specifically, it focuses on developing unique properties that offer the potential for abnormally high returns.  Once developed, Pacifica Holdings sells the properties to other firms.  In order to attract serious attention from firms that operate in the $105 billion dollar capital venture industry, an enterprise is expected to show a clear path to profitability (Anderson 2000). The project in this case is to analyze Pacifica Holdings LLC’s, newest capital venture interest, the Aqua Resort and Casino, to determine if such a “clear path to profitability” exists for this venture.  

Aqua Resort and Casino is negotiating to obtain Hawaii’s first gambling license. To capitalize on this opportunity, Pacifica Holdings LLC desires to make the Aqua Resort and Casino a one of a kind fantasy destination. This premier resort will be built at the affluent Ko‘Olina community off the coast of west Oahu. Oahu includes the primary population base of Hawaii and is the most visited of all the Hawaiian Islands. The Island of Oahu includes many premier attractions including Waikiki, The North Shore, The U.S.S. Arizona and U.S.S. Missouri Memorials, Diamond Head, and many other attractions. Its location will allow the resort to leverage on Hawaii’s “dream destination” reputation by creating a first-class, “must-see” venue inspired by the waters of the Pacific. All 100 acres of the property, including the hotel and casino, will celebrate the wonders of the Pacific, by showcasing the richest and most diverse ecosystem on the planet (Allard, 2002). Pacifica Holdings LLC has predicted minimum initial investments of 1.3 billion.

At least two similar proposals have been forwarded since September 11, 2001, one by the Hilton Corporation and the other by Sun International.  The proposal discussed in this case would be built on the same location as proposed by Sun International.  To date, no one has been successful in obtaining the necessary state gamming license.  However Pacifica Holdings believes that a more favorable climate for such a proposal exists subsequent to the events of September 11, 2001, and the outbreak of Severe Acute Respiratory Syndrome (SARS).  Each of these events significantly impacted the Hawaii Economy in a negative way. 


Target Market


The Aqua Resort and Casino’s intended target is the $31 billion dollar, 35 million visitor, Las Vegas gambling market. Within the gambling market itself, the first demographic group of interest is Hawaii residents. It is well known that Hawaii residents have a healthy appetite for gambling. This is documented by the fact that over 40,000 Hawaii residents visit Las Vegas each month, accounting for 80 percent of the hotel stays at Boyd hotels in Las Vegas (Batt 2001). The Aqua Resort and Casino will be able to provide this group with their favorite pastime, without requiring them to travel outside of the state. Keeping these Hawaii residents in Hawaii will benefit both the Aqua Resort and Casino and the State of Hawaii.

The second demographic target will be Asian tourists. Asian tourists account for over 1.4 million Las Vegas visitors each year and approximately 1.8 million of Hawaii’s visitors (State of Hawaii Department Business Economic Development and Tourism 2000, Las Vegas Convention and Visitors Authority 2001). Asian tourists are legendary for their love of Hawaii and for their uninhibited spending habits, as is documented by the fact that Japanese visitors spend the most per day among all visitors to the State of Hawaii (State of Hawaii Department of Economic Development and Tourism 2000). The closer geographic proximity of Hawaii to the Asian Continent along with the general attractiveness of the State of Hawaii is expected to give The Aqua Resort and Casino a clear competitive advantage over its Las Vegas competition. The Aqua Resort and Casino has chosen to target these two segments because it will allow the resort and the state to gain a foothold in the gaming business, by targeting already familiar audiences. In time, the management of the Aqua Resort and Casino will extend these targets to include other market areas.


State Payments and State Incentives


The State of Hawaii, is eager to stimulate economic activity in the aftermath of September 11, 2001. The subsequent drop in tourism and other economic activity have resulted in a large state budget shortfall. Several proposals have been forwarded to reduce this budget shortfall. These proposals have included offering a gambling license in exchange for a large cash payment by the recipient.  The Aqua Resort and Casino will make a $100 million payment to the State of Hawaii on December 31, 2003 in exchange for an exclusive gambling license for 20 years of operation. This expense will be amortized in equal annual amounts over the life of the license starting the day that the casino opens for business. In addition, the Aqua Resort and Casino has agreed to donate one percent of gross gambling revenues to the State of Hawaii in the form of educational grants to the University of Hawaii System.

While Aqua Resort and Casino will make several forms of payments to the State, it expects to receive certain incentives from the State of Hawaii as follows: (1) The state will arrange a tax deal for the company so that it is exempt from all federal, state, and general excise taxes for the construction (startup) period and the first three years of operation. After that, the company’s combined federal and state income tax rate will be 35 percent, and it will rise one percent every two years up to a maximum combined state and federal tax rate of 38 percent. In addition, the company will need to pay the State general excise tax, which operates similar to a sales tax, of four percent of sales after the exemption expires. (2) The company will pay $20,000 in state property taxes per year, beginning in the fourth year of operation. This amount is considerably less than would be required under regular tax laws. State property taxes are payable at the end of each year. (3) At the beginning of each of the first five years of operation, the company will receive up to a $10 million dollar matching grant from the Hawaii State Visitor’s Bureau. These monies must be used only to promote and market the resort and casino and thus, the State of Hawaii.  The grant is limited to $10 million, or 50 percent of total advertising expenditures whichever is lower. 


The Aqua Resort and Casino 


The Aqua Resort and Casino will include lodging, recreation and shopping facilities, as well as the casino. The magic begins when guests arrive at the primary entrance of the resort and encounter the enclosed arched passageway teeming with exotic sea life. Beyond the entranceway, guests will enter the double-tiered mall, which will include moderate priced and specialty shops, theatres, various restaurants, lounges, and aquatic displays. The interior of the hotel will be constructed of off-white Italian marble, reproducing the look and feel of a shallow tidal pool, vivid with sea life. Below the forum will lie the resort’s main attraction: the first and only casino in the State of Hawaii.

The Casino will contain some 2,000 slot machines and 100 gaming tables.  The casino will be entirely outfitted in a rich décor, specifically designed to lend itself to the bluish-green tones of the 360-degree, floor-to-ceiling aquarium.  The aquarium will be the namesake of the Aqua Resort and Casino and will constitute the worlds largest aquarium.  While the aquarium will be the fourth aquarium in the state of Hawaii, it will be several times the size of all the other aquariums combined (Hayworth 2002).  The aquarium, will not only be the largest aquarium by size, it will house the largest collection of marine species in the world.  It will showcase nearly 2,000 species of sea life, making it the world’s largest display of marine life. Slot machines and gaming tables will be positioned in circular formations so that all casino patrons can enjoy the full mile of glass viewing area contained within the casino.

A special “high rollers” room, adorned in black marble and velvet, will house a one-of-a-kind aquatic display entitled: Phantoms of the Deep. This aquarium, replicating the Pacific’s mesopelagic zone at deeper than 3,000 feet (where there is no light penetration) allows these high rollers to see wonders many have never seen. This unique exhibit will accommodate a host of eerie mortals including bloodbelly jellies, spider crabs, zebra morays, spotted ratfish, sea whips, predatory tunicates, pacific viperfish, pacific blackdragons, gulper eels, hatchet fish, and fangtooths.

            The aquarium will contain an additional two miles of glass viewing area outside the casino. This area will be filled with sitting areas where guests can relax and enjoy the tranquility of the aquarium. This area will be used to accommodate those hotel guests that wish to view the aquarium without entering the casino. This area will also accommodate those who wish to visit the aquarium but are not guests of the hotel or casino. Those who wish to visit the aquarium but are not guests of the hotel or casino will be charged an admission fee to enter the aquarium.

Rising forty stories above the foyer and casino will be the lodging accommodations. This will include two stories consisting of the lobby, forum shops, theatres and restaurants, one story for hotel business, 35 stories of plush hotel rooms, a one-story conferencing and entertainment facility, and a one-story penthouse to accommodate the highest of rollers. The first two floors will provide the 500,000 square feet of net leaseable space for the forum shops, theatres, restaurants, and lounges. The hotel will have 500 standard rooms, 350 junior suites, 250 executive suites ten penthouses and two executive penthouses.  Each of the 1,112 sea-themed suites will provide ocean views and full amenities.  The rooms will be of varying quality to accommodate a variety of tastes and budgets.

The grounds surrounding the hotel and casino will not be outdone. When one views the vistas of the Aqua Resort and Casino, designed explicitly to rival the best in the world, they will come to understand the true meaning of “paradise lost”.  Guests will experience the ultimate in tranquility, harmony and unparalleled ambiance. One could choose to wander miles of intimate paths enclosed by 2000+ species of flora and fauna or take a ride on one of the fleet of canoes that criss-cross the grounds through authentic inland waterways or enjoy and afternoon at one of several swimming pools. The grounds will include secluded spots for quiet contemplation, as well as gathering spots including four outdoor eateries and a spa. Activities for every age group are offered on the hour, ranging from free hula lessons to scavenger adventures. Feeding into the landscaped premises is a full mile of white sand beach, beyond which scuba divers can explore the shallow reefs that ring the island. For the more daring adventure seeker, a marina jam-packed with water sports, is just a short distance away.




On December 31, 2003, Aqua Resort and Casino will purchase and pay for one-third of the land on which the resort and casino will be constructed. The 100-acre parcel is expected to cost $108,000,000 dollars. One-third of the purchase price of the land will be paid for each on December 31, 2003, December 31, 2004, and December 31, 2005. Aqua Resort and Casino will not be required to pay interest on the unpaid balance of the land purchase price. Net Working Capital of $10,000,000 is also needed. This money will need to be available on December 31, 2003 and must be available at all times throughout the life of the project. Construction of the Aqua Resort and Casino will begin on December 31, 2003 and will take three years to complete. Construction of the hotel and casino section of the resort is expected to cost a total of $600 million dollars.

The casino, which will be constructed underground will be the first segment to be erected. Construction will start on January 1, 2004. Intensive blasting is needed to make the construction of the casino underground possible. After the blasting is complete, an extensive network of steel fittings must be positioned to support and protect the weight of the massive aquariums and the subsequent building of the hotel. This groundwork is expected to cost $70,000,000. The 100,000 square ft. casino building is projected to cost an additional $95,000,000. The entire process from blueprint to building is expected to be complete within one year. Payment for the groundwork and 40 percent of the building costs is due on December 31, 2004. The rest of the casino building costs will be due at the same time as the last payment for the land.            

  Immediately thereafter, construction of the 40-story hotel will begin. Construction from the casino up will cost an estimated $435 million and will take approximately 2 years to complete. Construction costs will be paid as follows: 35 percent of total construction costs will be due December 31, 2004, 45 percent of total construction costs will be due December 31, 2005 and the 20 percent of total construction costs will be due December 31, 2006. Aqua Resort and Casino will not begin depreciating the hotel and casino until the day the Resort and Casino opens for business. From then on, the construction costs of the hotel and casino will be depreciated using twenty-year straight-line depreciation to a salvage value of $100,000,000. 

Two years after construction begins on the casino construction on the landscaping of the resort will begin. This will include construction of the swimming pools, the manmade lagoons and tide pools, the golf course and tennis courts, and other activities and highlights.  At this time the tropical backdrop of the resort will be created, which will include any necessary land improvements. Landscaping of the resort is expected to cost an estimated $87,000,000 dollars. Aqua Resort and Casino will pay for one-fourth of the costs of landscaping on December 31, 2004, one-half of the landscaping costs on December 31, 2005 and the remaining balance on December 31, 2006. Of course, the land will not be depreciated.  However, the landscaping costs will be amortized by an equal amount each year over a period of 20 years, starting the day Aqua Resort and Casino opens for business. 

Additional outdoor construction includes four outdoor eateries, consisting of two restaurants, two lounges and a 25,000 sq. ft. freestanding health spa. The expected costs are $750,000 for each restaurant, $350,000 for each lounge, and $800,000 for the spa.  Aqua Resort and Casino will pay for these expenditures on December 31, 2006. Thereafter, $500,000 dollar payments will be due at the end of each of the next three consecutive years. Aqua Resort and Casino will not be required to pay interest on the unpaid balance.  Ten-year MACRS depreciation will be used on all outdoor structures starting on January 1, 2007. The ten-year MACRS depreciation percentages are as follows: 10/18/14/12/9/8/7/6/6/6/4.

The cost of all interior decorations, including equipment (less casino equipment), furniture, fixtures, upholsteries, and the like is estimated at $305,000,000. Casino equipment is estimated to cost an additional $60,000,000.  All interior decorations and casino equipment will be paid for on December 31, 2005. All interior decorations and casino equipment will be depreciated using seven-year MACRS depreciation. The scale is as follows: 14/25/18/12/9/9/9/4. Aqua Resort and Casino will begin depreciating all interior decorations and equipment on the day the resort opens for business.

The installation of all aquariums components systems is projected to cost $102,000,000 and sea life for the entire resort cost an estimated $50,000,000. The putting in place of all aquarium arrangements will be done on December 01, 2006. The aquarium component and sea life costs are due at the end of that month. The aquariums will be depreciated using ten-year MACRS depreciation. The ten-year MACRS depreciation percentages are provided above.  The sea life will not be depreciated because reproduction of new sea life within the aquarium is expected to offset any reduction in value due to age. 




Opening day for the Aqua Resort and Casino is set for January 1, 2007. Advance reservations have given the company a positive view of what is to come.  Estimated room occupancy rates are provided in Table 1.  Room occupancy rates are expected to remain at 2009 levels in subsequent years. Average daily room rates are provided in Table 2. These rates are consistent with rates charged by other resorts in the State of Hawaii.   These rates have been adjusted to take into account the effects of complimentary rooms that are offered to those who wager heavily.  Use of the conferencing facility will be free to groups staying in the hotel.  When not being used as a conference facility, the conferencing facility will be used for various entertainment shows. 


Table 1:  Hotel Occupancy Rates










Junior Suite




Executive Suite








Executive Penthouse





Table 2:  Hotel Room Prices
















Junior Suite







Executive Suite














Executive Penthouse








As stated earlier, there is 500,000 square feet of net leasable space within the hotel complex, which will be available for forum shops, theatres restaurants and lounges. The forum shops located on the ground and first floors will be leased to Mall Mania Inc. The lease will be for 20 years at an annual arrangement of $50,000,000 for 300,000 square feet. Hungry Man International will lease the remaining 200,000 square feet for a lease term of ten years at $35,000,000 per year. Hungry Man International Inc. will then manage all in-house restaurants, lounges and cafes. Operation for all outdoor restaurants and lounges will be leased to Paradise Foods Inc. for an annual rent of $28,000,000 for ten years. The Aqua Resort and Casino will own all improvements made to the leased parcels after the lease term expires. In addition to the fixed lease amount, Paradise Foods Inc. will give the Aqua Resort and Casino 5 percent of its gross revenues. Gross annual revenues for the Paradise Foods Inc. are expected to be $5,000,000 for each restaurant, and $2,000,000 for each lounge.  Gross revenues for Paradise foods are expected to increase by 2 percent per year.  The leases will begin on January 1, 2007.  Also, since the spa is not leased out to any entity, but run by the resort itself, gross revenues are expected to be $100.00 per square foot per year.     

The Aqua Resort and Casino will also enter into joint collaborations with a local tour operator also with a tour agency.  The tour company will be contracted to provide tours to various tourist attractions on the islands. The Marina will be contracted to provide water sports and activities at a nearby Marina. The agreement calls for the tour company and marina to give the Aqua Resort and Casino 20 percent commissions on all tours booked by guests who are referred through the resort. Commissionable sales are expected to be $10,000,000 and $12,000,000 for the tour company and marina respectively in the first year of operation.  Each year thereafter commissionable sales are expected to grow 8 and 9 percent respectively.     

With restricted competition and a receptive market, the casino is expected to see annual net revenues (amount gambled less winnings paid out) of $500,000,000 per year in 2007. Casino revenues are expected to increase by 3 percent per year.  Other revenues for the Aqua Resort and Casino include grants and movie deals. The Aqua Resort and Casino will receive a $1.5 million yearly grant from Endangered Sealife Org. for providing breeding and captivity grounds for endangered sea creatures.  Movie deals will provide $3 million and $2.2 million of revenues at the end of years 2007 and 2009, respectively. For convenience purposes, assume all revenues are received in cash at the end of each respective year. In addition to the hotel and casino guests, 1,200,000 people are expected to visit the aquarium each year. The admission fee for entrance to the aquarium will be $30 per person. These figures are consistent with those reported by the Monterey Bay Aquarium (Monterey Bay Aquarium, 2003). The entrance fee will remain constant for the first three years of operation. In the fourth year, the admission fee will be increased to $35 per person and will remain at that level for the following three years. In addition, various offspring from the aquarium will be sold to other aquariums throughout the world.  Revenue from these sales are expected to be $5,000,000 in each year of operation.


Operating Costs


The Aqua Resort and Casino will ultimately employ 3,000 people. During the years 2003 and 2004, 200 people will be employed. Two hundred additional employees will be added for the year 2005 and another 600 for the year 2006. On January 1, 2007, the additional 2,000 people will be hired bringing the total to 3,000 employees. Thereafter, the number of employees will remain constant at 3,000. At each stage, approximately 15 percent of the employees will earn $19,000 per year, 35 percent will earn $24,000, 34 percent will earn $29,000, 10 percent will earn $40,000, and 6 percent will earn salaries of $80,000. All reported salaries include benefits. In addition, the company has negotiated with the union an inflation plus 0.5 percent annual salary increase for each employee for each year after 2003. Inflation is expected to be 1 percent per year throughout the forecast period. The firm will receive a 20 percent tax benefit for those salaries incurred prior 2007.  For convenience purposes, assume that all salaries are paid in cash at the end of each respective year.

 Food, beverage, entertainment and other direct costs will be 19 percent of total gross revenues. Maintenance, and replacement of the creatures and aquarium components will be contracted out for $2,000,000 per year for each of the first six years of operations. In addition, the firm will need to pay for replacement parts are estimated to cost $1,000,000 per year for each of the first six years of operations.  During the construction period, insurance is provided by the contractors at no cost to Aqua Resort and Casino.  When operations begin, insurance costs is expected to be $20,000,000 per year to carry a $100,000,000 dollar insurance policy. This policy will cover the entire resort and casino and guests and employees. Insurance costs are payable at the end of each year. The insurance costs are expected to remain constant for five years, and then increase by 4.5 percent in each of the next five years.  General and administrative expenses are projected to be $425,000 per year during the construction period and will increase to $925,000 when Aqua Resort and Casino opens for business. The firm will receive a 20 percent tax benefit for those general and administrative expenses incurred during the construction phase.  General administrative expenses are expected to grow by 2 percent each year after 2003. Marketing Expenses are projected to total $22 million in the fist year of operations, $18 million per year for the second two years of operation and $15,000,000 for each subsequent year of operation. While the company will not make any expenditures on marketing during the construction period, it expects to receive considerable free marketing through write-ups in various magazines and on television shows. As indicated earlier, the Hawaii State Tourism Authority will pay for part of the advertising and marketing costs. During the construction period utilities will be paid by the contractor.  During operation, utilities are projected to run at $150,000 per month.   Utility expenses are projected to increase by four percent annually. For convenience purposes, assume that the expenses discussed in this paragraph, are paid in cash at the end of each respective year.

Sale of the Operation


After six years of operation, Aqua Resort and Casino will be sold to Pacifica Holdings LLC’s sister company, Worldwide Properties. Woldwide Properties specializes in the operation of developed properties.  Worldwide Properties have agreed to buy the property and rights to the Aqua Resort and Casino for $1.4 billion dollars, as long as projected revenue figures are realized. The breakdown is as follows, $150,000,000 for the land, $550,000,000 for the hotel and casino, $213,500,000 for the interior decorations and equipment, $48,750,000 for the casino equipment, and $437,750,000 for the gambling license.  In addition, Pacifica Holdings LLC will be able to withdraw the working capital from the company immediately prior to the sale.  The cost of capital for this project is estimated to be 20 percent.

End of Case Questions 


1.         Create a cash flow analysis for capital budgeting purposes for this project. For this analysis, assume that the expected revenues are realized and the entire operation is sold to Worldwide Properties at the end of the tenth year of operations.

2.         Use a scientific technique to determine if Pacifica Holdings LLC should undertake the project. Specifically, the Internal Rate of Return and New Present Value of the project should be computed.

3.         Discuss modifications to the plans developed here that might improve its chances of success. It is not   necessary to provide a numerical analysis of your recommendations. 




1.         Allard, Stephanie, (2002), "Marine Resources," published at

2.         Andersen, Ken (2000) “Venture Capital Investments Top $100 Billion in 2000.” Venturewire Newsrelease, 12-22-2002. p. 1.

3.        Batt, Tony (2000) "Gambling Expansion: Hawaii target of gaming company." Gaming Wire, 02-15-2002. Published at

4.        Hayworth, Philip (2002), "Hawaii's Marine Zoos" Aloha Vol. 28(23), May/June, p. 24-39.

5.        Las Vegas Convention and Visitors Authority (2001), "2001 Las Vegas Visitor Profile Study."

6.         Monterey Bay Aquarium (2003), Aquarium Facts and History, Monterey Bay Aquarium Website, as posted April 21, 2003 at

7.         State of Hawaii Department of Business, Economic Development and Tourism (2000), “Annual Visitor Research Summary Report 2000.”  

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