SHA611: Financial Analysis of Hotel Investments

School of Hotel Administration, Cornell University

Tool: Rules for the Owner’s Investment Decision

Owners must conduct a thorough analysis of the returns on a potential hotel investment
before deciding whether to proceed with the project. As Professor deRoos described,
there are two models for this analysis: the return on investment model and the return on
equity model. Each model has decision rules that help an owner determine whether or
not to invest in a hotel property. Use these decision rules when you are evaluating your
own hotel real estate projects.

Discount rate = Weighted Cost of Capital

Hurdle rate = Minimum Rate of Return

Net Present Value (NPV) = (Cash Flows + Hurdle Rate) + Initial Investment
Internal Rate of Return (IRR) = Discount Rate where NPV = 0

Decision Rules
If NPV > 0, then Invest
If NPV < 0, then Do Not Invest

If IRR > Hurdle Rate, then Invest

If IRR < Hurdle Rate, then Do Not Invest

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 SHA611: Financial Analysis of Hotel Investments
School of Hotel Administration, Cornell University

Discount Rate = Equity Hurdle Rate

Decision Rules
If NPV > 0, then Invest
If NPV < 0, then Do Not Invest

If Equity IRR > Hurdle Rate, then Invest

If Equity IRR < Hurdle Rate, then Do Not Invest

2
© 2016 eCornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners.