Big Investment in Small Hotel
Finance Assignment
Big Investment in Small Hotel
1. Is it a good investment? If so why? What can change the investment from a good one to a bad one?
There are different methods by which an investment can be evaluated. The method of choice would usually be the comparison of the Net Present Values of two investment opportunities as only the Net Present Values take into account the time value of money, the cash flow and cost of capital. Furthermore, the Net Present Value shows potential investors when they will be able to recuperate their investment. It also shows how much value is created or destroyed as a result of undertaking a project. Finally, the Net Present Value measures the attractiveness of a project in today’s pounds. This means that several projects can be combined. If a choice is given between two investment opportunities, the investment with the larger Net Present Value should be chosen.
Another method of calculating the merits of a project is the Internal Rate of Return. The Internal Rate of Return is useful because it is easy to calculate and it only depends on the cash flow of the particular investment project. On the other hand, the Internal Rate of Return only gives a percentage and no absolute value.
Judging from the values of the calculation, it is fair to say that the investment in the hotel room is preferable to the investment in the savings account:
1.1 Investment in the Savings Account
The Net Present Value of the Investment is exactly zero (if taxes are not taken into account). This makes perfect sense, as the discount rate of the future value equals the interest rate of the investment. Both rates are equal because the money is invested in a mutually risk free environment. Therefore there are neither gains nor losses if the money is invested in the savings account.
This also means, that the Internal Rate of Return is equal to 5 %.
(The calculations for the investment in the hotel room can be seen on sheet
Big Investment in Small Hotel
1. Is it a good investment? If so why? What can change the investment from a good one to a bad one?
There are different methods by which an investment can be evaluated. The method of choice would usually be the comparison of the Net Present Values of two investment opportunities as only the Net Present Values take into account the time value of money, the cash flow and cost of capital. Furthermore, the Net Present Value shows potential investors when they will be able to recuperate their investment. It also shows how much value is created or destroyed as a result of undertaking a project. Finally, the Net Present Value measures the attractiveness of a project in today’s pounds. This means that several projects can be combined. If a choice is given between two investment opportunities, the investment with the larger Net Present Value should be chosen.
Another method of calculating the merits of a project is the Internal Rate of Return. The Internal Rate of Return is useful because it is easy to calculate and it only depends on the cash flow of the particular investment project. On the other hand, the Internal Rate of Return only gives a percentage and no absolute value.
Judging from the values of the calculation, it is fair to say that the investment in the hotel room is preferable to the investment in the savings account:
1.1 Investment in the Savings Account
The Net Present Value of the Investment is exactly zero (if taxes are not taken into account). This makes perfect sense, as the discount rate of the future value equals the interest rate of the investment. Both rates are equal because the money is invested in a mutually risk free environment. Therefore there are neither gains nor losses if the money is invested in the savings account.
This also means, that the Internal Rate of Return is equal to 5 %.
(The calculations for the investment in the hotel room can be seen on sheet