HB 311 1st Edition Lecture 15 Capital Budgeting All non reoccurring expenditures made for the long term well being of the hotel How much you should spend so product remains fresh Should we invest or not invest What should we invest in What is Capital Expenditure Expenditure on fixed assets that are large in nature and yield returns beyond one year Examples furniture carpeting computers rooms expansion of hotel safety features Importance of Capital Expenditure Decisions Lodging Investment is fixed asset intensive Challenges faced by managers regarding Cap Ex Reluctant owners who does not want to spend Conflict of interest owners managers franchisees and lenders Property with cash flow problems not enough available to spend on upgrading property Insufficient cash flow Insufficient estimation of reserve requirement Lack of information Relationship between operations budget cash budget and capital budget Operations budget plans to add to service reduce cost reduce employees Cash budget cash needs to provide for cap ex sources of cash inflow Capital budgeting Characteristics of Business Projects Project types and risks increasing risk according to whether they are replacements expansions or new ventures Business projects involve early cash outflows and later inflows Initial outlay is required to get started Capital Budgeting Techniques These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute Payback determines how many years it takes to recover a project s initial cost Net Present Value Determines how much the present value of the project s inflows exceeds the present value of its outflows Internal rate of return Determines rate of return the project earns internally Profitability index provides ratio of a project s inflows vs outflows in present value terms
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