In this project you are asked to conduct (using Excel) an analysis of a capital expenditure project proposed for an actual hospitality operation of your choosing. The project will be broken into two parts: 1) The preliminary project description and 2) the actual capital expenditure analysis. While you may make (reasonable) assumptions about the actual cash flows of the hospitality operation where your proposed project is to be undertaken, you must come up with accurate investment and operating cash flow estimations for the project itself. This will involve using sources and references outside of class reading materials. For example, if your proposed project is the replacement of your operation's present dish machine with a new one, you must propose a specific dish machine brand and model with a realistic estimate of the actual savings and costs associated with that brand model. This will entail library and, perhaps, internet research. Any references that you use in your analysis, whether direct quotes or restated in your words, must be documented in an appropriate bibliography section. Failure to adequately document your sources and material will severely penalize your score on the project.

Preliminary Project Description

In the preliminary project description, you will describe the actual hospitality operation where you propose to implement your project and describe your project in detail. You will also justify the need for the project, discuss what its value creating aspects are, and provide specific details of all assets and services needed to implement the project. This section will also include the specific documented costs associated with the purchase of the assets, services, and other expenditures associated with implementing the project. The format of your written document is to be business professional. That means that it should be put together with appropriate sections, bullets, graphs, charts, references, etc. as if you are presenting it at a staff meeting or to your General Manager. At a minimum, your written document should include the following (please feel free to add additional items as you see fit):

1. A three to five-page introduction describing your hospitality company.
   • This should include the name, location, and a detailed description of your company. You should also include a discussion of what you think the outlook is for the demand for the goods and services that your company produces and sells over the next 5 years (document this discussion with appropriate references).
2. A description of the project that you propose to implement at your hospitality company.
   • This should include a general description of the project and why you think that it will create value for your company. You should carefully justify and document (where possible) why you think that it is a desirable project and how it will create value for your company (be sure to address any appropriate value creation principles that we have discussed in class in this discussion). You should tie your discussion in this section together with your projections of demand for your company's goods and services from Part 1 above.
3. A detailed and documented description of the specific costs associated with the purchase of the assets, services, and other expenditures associated with implementing the project.

• • Here you need to provide an inclusive list with associated costs of all of the equipment, materials, and other supplies that will initially be needed to implement your project. With equipment, you must be specific as to brand and model (and justify why you picked the particular brand and model that you chose). You must also detail and provide approximate costs of any labor or services that will be employed to implement your project (these are expenses related to installing, building, or implementing the project - NOT expenses related to the operation of the project after all of the necessary initial equipment and assets have been purchased and installed.)

Additional Specific Instructions:

1. Make sure that you explain the analysis of your project and company clearly and completely. Your discussion should be clear and convincing.
2. You must use references to document any facts that you refer to. Place a bibliography at the end of your paper giving the complete citation of any reference that you use.

Project Valuation Analysis

In this section of your project you will conduct a value analysis of your project, i.e., determine whether it is a value creating course of action for your hospitality company. This will involve using the material that you have presented in your preliminary analysis as well as a detailed assessment of the risk of your project and the cash flows that your project generates. With this information, you will apply the valuation techniques that we have discussed in class to determine whether or not your project will create value for your hospitality firm. In addition to resubmitting the corrected first part of your project, this section of your written document and spreadsheet analysis should include (at a minimum) the following (please feel free to add additional items as you see fit):

1. A Risk Assessment of Your Project.

A discussion of the relevant risk () of your project. Note: You need to identify a specific for your project and also to explain in detail how you determined it. You must also discuss how the risk of your company compares to the risk of the overall market and to other typical hospitality businesses.

A discussion the current risk free rate. Note: Here you need to identify the risk free rate that you will be using in your calculation of k_e, and explain how you arrived at the value.

A discussion of the risk premium on the market portfolio that you will use in the estimation of the required return for your project. Note: Here you need to determine what rate you will be using for the difference between the expected return on the market portfolio (k_m) and the risk free rate and where it comes from.

A calculation of your owner's required rate of return (k_e) for your project. Note: Using the Security Market Line (SML) relationship, you will calculate your company's k_e. You must show your calculations. Also, you must explain what the concept of k_e, means in general, illustrating your discussion using your calculated k_e.

1. An Estimate of the Weighted Average Cost of Capital (k_a ) for Your Project.

An estimate of the Leverage Ratio (L) for the financing of your project. Explain your calculations and assumptions carefully and completely!

An estimate of the borrowing cost (k_d) on any debt capital used to finance your project. Explain your calculations and assumptions carefully and completely!

An estimate of the tax rate () associated with your hospitality firm and project. Explain your calculations and assumptions carefully and completely!

The calculation of the actual weighted average cost of capital (k_a) for your project.

3. An Estimate of Your Project's Net Cash Flows (NCF)

1. 1. The investment outlays for your project. Note: Show and explain your calculations and assumptions carefully and completely!
   2. The annual after-tax operating cash flows (OCF_t) for your project for each year of the project's life. Note: Show and explain your calculations and assumptions carefully and completely (you must include an explanation of the assumptions you have made for each cash flow for your project)! Also, you must make and show your calculations using a spreadsheet.
   3. The net termination cash flows other than the OCF_t, of the project. (That is, what are the cash flows that result when the project is sold and/or the assets disposed of?) Note: Show and explain your calculations and assumptions carefully and completely!
   4. A timeline with all of the project's cash flows as well as the Net Cash Flows shown for each year. Note: You may create this by hand or in your spreadsheet program

4. The Valuation Analysis of Your Project.

The payback period for your project. Note: Show and explain your calculations and assumptions carefully and completely! Calculate the payback period to at least one decimal place.

The IRR of your (Use the IRR function in Excel to calculate the IRR). Note: Show and explain your calculations and assumptions carefully and completely! Make sure that you report the IRR using two decimal places. In addition to finding the IRR via the computer, find the IRR graphically by drawing the NPV profile of your company. Graph at least 5 different NPVs for your IRR graph.

The NPV of your project using the NPV function in Excel. Note: Show and explain your calculations and assumptions carefully and completely!

Whether you should you go ahead with your project or not. Note: Be sure to explain the basis for your decision carefully and completely. If you determine that your project is not value creating in its present form, discuss ways that you might alter your concept to make it value creating.

5. Additional Specific Instructions

1. 1. The format of the written portion of your analysis is to be business professional. That means that it should be put together with appropriate sections, bullets, graphs, charts, references, etc. as if you are presenting it at a staff meeting, or to your General Manager, or to your board of directors.
   2. All analysis (except where noted) will be completed using a computer spreadsheet, e. Excel or a similar spreadsheet. Any explanations necessary must be typed or legibly written.
   3. In addition to the regular spreadsheet output, you must print out the formulas you used for your calculations. It must show the formulas on the screen instead of the numbers. When using Excel, for example, highlight the cell(s) you are interested in, pull down the "Tools" menu, click on "options", and click on the "formulas" box. This will then display the formulas. The formula printouts are to be handed in with the spreadsheet output. They do not have to all fit onto one page.
   4. Always BACK UP your project files! It is best to back them up every few minutes when you are working and keep a copy of your original files on a separate backup disk (online storage is even better).