Ritz Carlton

Topics: Net present value, Ritz-Carlton Hotel Company, Internal rate of return Pages: 14 (5286 words) Published: February 12, 2008
http://qualitydigest.com/IQedit/QDarticle_text.lasso?articleid=12186 http://www.businessweek.com/smallbiz/content/feb2007/sb20070213_171606.htm http://www.answers.com/Ritz+carlton+hotel?cat=biz-fin

1-What was the total capital budget at the Ritz Carlton Hotel? Capital Budget: Long-term financing and expenditure plan for acquisition, construction, or improvement of fixed assets such as land and buildings The total capital budget of Ritz Carlton Washington D.C. was $225 million. this hospitality complex covered tow- and a half acres and include 162 luxury condominiums , a 100, 000 square foot Sports club /LA , a splash Spa , three restaurants , 40000 square feet of street-level restaurants and retail shops featuring the latest designs from Italy and other countries ,as well as 300 room hotel. 2- What was the cost of capital for each division at the hotel? The rate of return an enterprise has to offer to induce investors to provide it with capital. The cost of loan capital is the rate of interest that has to be paid. The cost of equity capital is the expected yield needed to induce investors to buy shares. Capital (money) used to fund a business should earn returns for the capital owner who risked their saved money. For an investment to be worthwhile the estimated return on capital must be greater than the cost of capital. Otherwise stated, the risk-adjusted return on capital (incorporating not just the projected returns, but the probabilities of those projections) must be higher than the cost of capital. The cost of debt is relatively simple to calculate, as it is composed of the interest paid (interest rate), including the cost of risk (the risk of default on the debt). In practice, the interest paid by the company will include the risk-free rate plus a risk component, which itself incorporates a probable rate of default (and amount of recovery given default). For companies with similar risk or credit ratings, the interest rate is largely exogenous. Cost of equity is more challenging to calculate as equity does not pay a set return to its investors. Similar to the cost of debt, the cost of equity is broadly defined as the risk-weighted projected return required by investors, where the return is largely unknown. The cost of equity is therefore inferred by comparing the investment to other investments with similar risk profiles to determine the "market" cost of equity. The cost of capital is often used as the discount rate, the rate at which projected cash flow will be discounted to give a present value or net present value. 3- What was the marginal return on investment in each division? Return on investment (ROI) is a financial ratio that compares the amount of income derived from an investment with the cost of the investment. ROI is known as a profitability ratio, because it provides information about management's performance in using the resources of the small business to generate income. A performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. To calculate ROI, the benefit (return) of an investment is divided by the cost of the investment; the result is expressed as a percentage or a ratio.

Return on investment is a very popular metric because of its versatility and simplicity. That is, if an investment does not have a positive ROI, or if there are other opportunities with a higher ROI, then the investment should be not be undertaken. 4-What is the net present value at the Ritz Carlton hotel?

Net present value: A technique for assessing the worth of future payments by looking at the present value of those future cash flows discounted at today's cost of capital. The difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyze the profitability of an investment or project. Net present value (NPV) is a standard method for the financial appraisal of long-term...
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