Financial Analysis For Hotels Samples †MyAssignmenthelp.com

Question: Discuss about the Financial Analysis For Hotels. Answer: 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 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 projects 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 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 investments 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. References Elango, S., Garc?a, 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.