Hospitality Financial Management

This article discusses the accounting rate of return, payback period, NPV and IRR in hospitality financial management. It compares different investment options and recommends the best option for investment. The article also explains the concept of hurdle rate and its importance in investment decisions.

Running head: FINANCIAL MANAGEMENT
Hospitality Financial Management
Name of the Student:
Name of the University:
Authors Note:

1HOSPITALITY FINANCIAL MANAGEMENT
Table of Contents
In Response to Question 1..........................................................................................................2
In Response to Question 2..........................................................................................................3
Reference....................................................................................................................................5

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In Response to Question 1
a) Accounting Rate of Return
Accounting Rate of Return (A.R.R)
Particulars Option A Option B Option C Option D
Average Investment 41,000 33,000 39,500 38,000
(-) Depreciation 13600 10800 13800 12800
Annual Savings 1,000 4,000 7,400 2,700
(-) Income Tax @ 27.5% 275 1100 2035 742.5
Annual Net Savings 725 2,900 5,365 1,958
Accounting Rate of Return (A.R.R) 1.77% 8.79% 13.58% 5.15%
b) Payback Period for each of the option was determined by calculating the net annual
cash savings from the project and the expected cash flows from the project during the
time of project:
Cash Flows and Calculation of Payback Period
Particulars Option A Amount Option B Amount Option C Amount Option D Amount
Initial Investment 75,000 60,000 74,000 70,000
Year 1 14,325 60,675 13,700 46,300 19,165 54,835 14,758 55,243
Year 2 14,325 46,350 13,700 32,600 19,165 35,670 14,758 40,485
Year 3 14,325 32,025 13,700 18,900 19,165 16,505 14,758 25,728
Year 4 14,325 17,700 13,700 5,200 19,165 0.86 14,758 10,970
Year 5 14,325 3,375 13,700 0.38 19,165 14,758 0.74
Year 6 14,325 0.24 13,700 19,165 14,758
Total Time (Years) 5.24 4.38 3.86 4.74
Payback period 66400 64000 91200 67200
Annual Cash Savings 725 2,900 5,365 1,958
(+) Depreciation 13600 10800 13800 12800
Net Annual Cash Savings 14,325 13,700 19,165 14,758

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c) The best option which would be recommended for investment would be going for
Option C as the Accounting rate of return generated from the option is considerably
higher than other options presented. The payback period calculated from the option is
also less which shows that the amount invested in the project would be recovered at
the initial stages than other projects. The accounting rate of return generated from the
project is around 13.58% and the payback period for the option C was around 3.86
Years (Magni and Martin 2017).
In Response to Question 2
a) The NPV or the Net present Value for the project was calculated using the discount
rate of 8% and after considering the initial investment and the cash flows generated
from the project.
b) The IRR or the internal rate of return shows the return or the percentage of the return
generated from the project in the terms of percentage. The same was calculated by
using the initial investment and the cash flows generated from the project.
Particulars Option A Option B Option C Option D
Investment Amount -83,000 -63,000 -72,000 -70,000
Residual Value 15,000 11,000 12,000 10,000
Projected Cash Flows -83,000 -63,000 -72,000 -70,000
Year 1 20,000 19,000 23,000 19,000
Year 2 19,000 18,000 22,000 18,000
Year 3 18,000 16,000 21,000 17,000
Year 4 17,000 16,000 21,000 16,000
Year 5 32,000 28,000 29,000 27,000
NPV 343.62 12539.64 18519.23 6163.02
IRR 8% 15% 18% 11%

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c) Option C would be considered as the viable option for investment if the hurdle rate or
the required rate of return for the project is set to be 15%. The hurdle rate shows the
minimum required rate of return that showed be generated from the project in order to
remain profitable for the investors. Any option considered above the hurdle rate will
result in wealth creation for the investors and any option below the hurdle rate will
result in wealth destruction for the shareholders (Banerjee 2015).

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Reference
Banerjee, S., 2015. Contravention Between NPV & IRR Due to Timing of Cash Flows: A
Case of Capital Budgeting Decision of an Oil Refinery Company. American Journal of
Theoretical and Applied Business, 1(2), pp.48-52.
Magni, C.A. and Martin, J.D., 2017. The Reinvestment Rate Assumption Fallacy for IRR and
NPV: A Pedagogical Note.