Exam 3 Review Sheet
The exam consists of about 45-50 questions divided into concepts and calculations. The focus of question
for this exam will be concepts and not calculations. The exam content will be from chapters 9, 10,11,3,
and slides and readings associated with these chapters.
What is Capital Expenditure x
Expenditure on fixed assets that are large in nature and yield returns beyond one year.
What is the difference between revenue and capital expenditures?
Revenue expenditures are defined as those whose benefits will be realized within a year. Capital
expenditures are defined as those whose benefits will be realized over a time greater than one year.
Capital expenditure projects often involve expansion, replacement, cost reduction, and government
Understand the concept of opportunity cost.
When a hospitality project uses assets or other resources that are already owned by the firm, the
Incremental Cash Flow principle tells us that the value of those resources must be attributed as a cost to
the project. Their use with the project represents an opportunity cost to the hospitality firm.
Understand the concept of sunk cost and allocated costs.
Sunk costs are cash outflows that have occurred before the time when a project is being evaluated.
Allocated costs refer to costs associated with the operation of the hospitality firm as a whole that are
apportioned to the various operating areas of the firm on the basis of some formula. Expenses that are
frequently allocated include administrative and general and other overhead costs.
What is the difference between accelerated and straight-line depreciation?
Regardless of whether a firm uses straight-line or accelerated depreciation, the total amount of
depreciation will be the same. Hospitality firms want to maximize this expense as early in the project’s
life as possible through the use of accelerated depreciation. By maximizing depreciation as early in the
project’s life as possible, the timing of the depreciation tax shield cash inflow is changed. The sooner a
cash inflow is received, the greater its present value will be. Thus, hospitality firms use accelerated
depreciation to maximize the present value of the depreciation tax shields.
What does capital rationing
Hospitality firms sometimes have more value-creating projects than they feel they can undertake at one
time. In this situation, a firm may limit its capital expenditures. This approach is called capital rationing.
Based on class slides what area of the hotel consumes most capital expenditures?
1. Guest room or suite: sleeping area, bath area, televisions
2. Public areas: corridors, lobby/ front desk, meeting areas, restaurants, lounge lobby bar
3. Building general: office and administration, parking, pool and spa, exterior painting, laundry and
housekeeping, kitchen, exterior elements
4. Building systems: roof, elevators, plumbing system
5. Technology: front office system, accounting system, POS, telecommunication/internet