HB 311 1st EditionLecture 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 TechniquesThese 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
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