3222-9 Project Cash Flows.pptx - HTM 3202 / HTM 3222...

10. PROJECT CASH
FLOWS ESTIMATION
HTM 3202 / HTM 3222
Financial Management in
Hospitality and Tourism
Financial Management in
Hospitality, tourism and events
Teacher: Tiffany Cheng/3400-
2235/[email protected]

After calculating the Weighted Average Cost of Capital, we have the
minimum required return that we can use to make decisions on our
capital projects.
So we begin the capital budgeting process.
First, in this chapter we estimate the cash flows of each year of the
project
Finally, in the next chapter, we can evaluate the cash flows using
various techniques.

CAPITAL BUDGETING
The decision-making process used in the acquisition of
long-term physical assets.
E.g. New hotel acquisition, expansion, renovation, addition of a
bar to a restaurant, replace security system

Analysis of potential projects

Long-term decisions

Large expenditures

Difficult/impossible to reverse

Determines firm’s strategic direction

PURPOSE OF THE CAPITAL
BUDGET PROJECT
Each project that a corporation plans to undertake depends
on the overall business model, mission and vision. The reason
they decide on these projects could be for below purposes:
Grow the corporation

Increasing future sales, profits, and cash. Includes expansion of facilities
or investments in new facilities.
Reduce costs/ Replacement of old capital assets

Reduce future operating costs Includes decisions to replace inefficient or
old assets, improve operational efficiency.
Meet legal requirements and ethical goals

Change in laws, standards, and contractual agreements. Includes
investment to promote employees awareness.

TYPES OF PROJECTS
Independent Projects

Stand-alone decisions

Analyzed to determine if it will increase value of the firm or not

For example, just one project, and you need to decide yes or no
Mutually exclusive projects (more common)

Choice between projects

Analyzed to determine the value of different options

Example: The store location should open a restaurant (project a) or a
café (project b)

The cash flows will be different, but you only have the option to
choose one of the options, not all.

ESTIMATION OF CASH
FLOWS
Most difficult step in capital budgeting:
- involves many variables, and different departments (Marketing,
Enginnering, etc…)
- can sometimes depend on your experience, but mostly on the accuracy
of the collected data from all parties
- investment amounts and cash flows from the project are forecasts
-need to ensure no biases are inherent in the forecasts and uses similar
assumptions
Only estimate relevant cash flows related to the project, and not
total cash flows of entire company

RELEVANT CASH FLOWS
Include only cash flows that will only occur if the project is accepted
Incremental cash flows
2 perspectives can be taken on this:
A. additional cash flows earned or lose because of the project
B. total amount of company cash flows with the project minus the
total amount of company cash flows without the project
The stand-alone principle allows us to analyze each project in
isolation from the firm simply by focusing on incremental cash flows