Financial Analysis: Kitchen Overhaul Investment for Hotels

This report presents a financial analysis of a proposed kitchen overhaul investment for a hotel, comparing offers from five potential contractors. The analysis employs two key methods: Net Present Value (NPV) and Internal Rate of Return (IRR). The report calculates and compares the NPV and IRR for each contractor, using an 8% discount rate. The findings indicate that Supplier C offers the highest NPV and IRR, making it the recommended choice for the hotel's kitchen overhaul. The report provides a clear comparison of the suppliers based on their financial metrics, supporting the selection of the most financially viable option. The report concludes with a recommendation to select Supplier C based on the financial analysis performed.

Running head: FINANCIAL ANALYSIS FOR HOTELS
Financial analysis for hotels
Name of the student
Name of the university
Author note

1FINANCIAL ANALYSIS FOR HOTELS
Table of Contents
Introduction................................................................................................................................2
Comparison of assessment technique.........................................................................................2
Net present value (NPV)............................................................................................................2
Internal rate of return (IRR).......................................................................................................3
Recommendation........................................................................................................................4
Reference....................................................................................................................................5

2FINANCIAL ANALYSIS FOR HOTELS
Introduction
The main objective of the report is to assess the investment cost for the major kitchen
overhaul for one of their restaurant of Blue Ribbon Restaurant Group. The general manager
will provide with the details of 5 potential contractors to discuss with them regarding the cost,
expenses and cash flows. For analysing various offers from 5 contractors, the trainee will take
into account various factors like present value of the cash flows, required internal rate of
return.
Comparison of assessment technique
The comparison technique that will be applied to analyse the project from various
contractor will be the (i) Net present value approach (ii) Internal rate of return
Contractor Net present value Internal rate of return
Supplier A $ 70,669.10 27%
Supplier B $ 76,221.20 36%
Supplier C $ 112,052.46 44%
Supplier D $ 74,030.13 33%
Supplier E $ 71,813.91 32%
Net present value (NPV)
The net present value is difference among the present value of the cash inflows and
present value of the cash outflows. For analysing the profitability of any project or any
investment, the NPV is used under the capital budgeting. The formula for NPV calculation is
–

3FINANCIAL ANALYSIS FOR HOTELS
NPV =∑
t−1
t Ct
( 1+ r )t −C0
Where, t = number of times in period
Ct = net inflow of cash during t
C0 = Total initial cost of investment
r = rate of discount
The positive value of NPV states that the earnings generated by the investment or the
project are more than the initial cost of investment. Normally, the project with the positive
NPV is considered to be profitable one and with negative NPV as not profitable one
(Vernimmen et al. 2017). The concept of NPV states that the investment or the project shall
be accepted only if it results into positive NPV values. Further, the rate of discount that is 8%
as per the given situation are taken into consideration to calculate the present value of the
cash flows over the future periods. Though different companies determine the rate of discount
in different ways, the common method is to use the expected return from other investments
(Ross et al. 2013). As per the given information provided by the general manager regarding 5
suppliers and calculation of the NPV, it is recognized that the NPV of supplier C is highest at
$ 112,052.46.
Internal rate of return (IRR)
IRR is rate of interest at which the NPV of all cash flow that is the negative as well as
the positive cash flows from any investment or project equals to zero. It is used for evaluating
the project’s attractiveness or feasibility (Elango et al. 2015). If the IRR of the project or
investment is more than the required return rate of the company then the project will be
feasible and will be considered for acceptance. On the other hand, if the IRR is lower than the

4FINANCIAL ANALYSIS FOR HOTELS
required rate then the project shall not be accepted. Formula for calculating the IRR is as
follows –
0 = P0 + P1/(1+IRR) + P2/(1+IRR)2 + P3/(1+IRR)3 + . . . +Pn/(1+IRR)n
Where, P0, P1 …… Pn represents the cash flows for the period 1, 2, 3…..n, and the IRR
equals the internal rate of return for the project.
IRR enables the managers ranking the projects through the overall return rate rather
than considering the present values and the project that has highest IRR will be selected. As
the comparison under IRR is easy, this approach is considered as attractive. However, the
IRR does not takes into account the investment’s absolute size (Sneps-Sneppe 2017). As per
the given information provided by the general manager regarding 5 suppliers and calculation
of IRR, it is recognized that the IRR of supplier C is highest at 44%.
Recommendation
As the trainee is supposed to take into consideration all the possible techniques for
assessment, from the given information he will consider the NPV approach and IRR approach
to analyse the offer from the suppliers. As it can be identified from the above provided table
that the NPV as well as the IRR of supplier is higher as compared to the other 4 suppliers, the
company is recommended to select supplier C for the major kitchen overhaul for one of their
restaurants.

5FINANCIAL ANALYSIS FOR HOTELS
Reference
Elango, S., Garcıa, J.L., Heckman, J.J., Hojman, A., Ermini, D., Rados, M.J., Shea, J. and
Torcasso, J.C., 2015. The internal rate of return and the benefit-cost ratio of the Carolina
Abecedarian Project. University of Chicago, Department of Economics.
Ross, S.A., Bianchi, R., Christensen, M., Drew, M., Westerfield, R. and Jordan, B.D.,
2013. Fundamentals of Corporate Finance: Introduction to corporate finance Chapter: 2
Financial statements, taxes and cash flow PART 2 Chapter: 3 Working with financial
statements Chapter: 4 Long-term financial planning and corporate growth PART 3 Chapter: 5
First principles of valuation: TVM Chapter: 6 Valuing shares and bonds PART 4 Chapter: 7
Net present value and other investment criteria Chapter: 8 Making capital investment
decisions Chapter: 9 Project analysis and evaluation PART 5 Chapter: 10 Lessons ....
McGraw-Hill Education (Australia).
Sneps-Sneppe, M., 2017. On the internal rate of return of IRR and the priority of
investments. International Journal of Open Information Technologies, 5(9), pp.39-44.
Vernimmen, P., Le Fur, Y., Dallochio, M., Salvi, A. and Quiry, P., 2017. The Time Value of
Money and Net Present Value. Corporate Finance: Theory and Practice, Fifth Edition, Fifth
Edition, pp.267-283.