A Survey of Capital Budgeting Methods Used by the Restaurant Indu

Topics: Capital budgeting, Net present value, Internal rate of return Pages: 10 (2594 words) Published: May 16, 2015
Journal of Hospitality Financial Management
The Professional Refereed Journal of the Association of Hospitality Financial Management Educators
Volume 8 | Issue 1

Article 1

1-1-2000

A Survey of Capital Budgeting Methods Used by
the Restaurant Industry
Robert A. Ashley
Stanley M. Atkinson
Stephen M. LeBruto

Follow this and additional works at: http://scholarworks.umass.edu/jhfm Recommended Citation
Ashley, Robert A.; Atkinson, Stanley M.; and LeBruto, Stephen M. (2000) "A Survey of Capital Budgeting Methods Used by the Restaurant Industry," Journal of Hospitality Financial Management: Vol. 8: Iss. 1, Article 1. Available at: http://scholarworks.umass.edu/jhfm/vol8/iss1/1

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The Journal of Hospitality Financial Management. Volume 8, Number 1,2000

A SURVEY OF CAPITAL BUDGETING METHODS
USED BY THE RESTAURANT INDUSTRY
Robert A. Ashley
Stanley M. Atkinson
and
Stephen M. LeBruto
ABSTRACT

The purpose of this study was to determine what capital budgeting and cost of capital procedures are being used in the food service segment of the hospitality industry and to compare the responses, where possible, with those reported in the previous studies of capital budgeting techniques in the hospitality industry. The most popular primary capital budgeting techniques selected were the sophisticated or discounted cash flow methods, such as net present value and internal rate of return. The payback method was selected as a secondary technique.

Introduction
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The food service segment of the hospitality industry is rapidly growing. Entry by hospitality industry firms and others into these lines of business is not without risk. It is expected that such expansion will make winners out of the companies that acquire the best locations and create the most innovative facilities. It is also expected that companies lacking the resources to adapt and grow are likely to be hurt by the onslaught of competition (Value Line, 1994). This expansion of the hospitality industry into food service, which is fixed asset intensive, has required firms specializing in this area to make capital investment decisions. It is therefore important to determine the capital budgeting practices of these firms. Many studies have been performed on the capital budgeting practices of major U.S. firms. Gitman and Forrester (1977), Gitman and Mercurio (1982), Brigham (1975), and Fremgen (1973) are examples of published research on capital budgeting techniques employed by Fortune 50011000 U.S. corporations. However, there have been relatively fewer studies determining the capital expenditure and capital acquisition policies of firms in the hospitality industry. Eyster and Geller (1981) compared the development of capital budgeting techniques employed by firms between 1975 and 1980.Their study included both lodging and food service companies. Eyster and Geller concluded that even though the industry used more sophisticated methods in 1980 than it did in 1975, the capital budgeting techniques used in the hospitality industry were misleading and naive as compared to other industries. Schmidgall and Damitio (1990) concluded that in 1990, more hospitality industry firms used discounted cash flow measures in their decision making than they did in 1980. However, Schmidgall and Damitio noted that many hotel chains still did not use formal risk analysis in their decision-making processes. The

The Journal of Hospitality Financial Management

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Schmidgall and Damitio study was limited to large lodging chains. Atkinson and LeBruto (1997) studied the capital budgeting of casino/gaming firms and found IRR most frequently for...
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