Four primary factors can impact the present value, net present value, and internal rate of return
of a potential investment.
- Weighted average cost of capital: The lower the weighted average cost of capital (WACC), the
lower the discount rate and the higher the NPV.
- Terminal cap rate: The lower the cap rate used to calculate the terminal sale price of the asset
at the end of the analysis period, the higher the sales price and the higher the PV, NPV, and IRR.
- Timing of cash flow: The more cash flow projected for the early years of an investment, the
higher the PV, NPV, and IRR.
- Development or acquisition cost: The lower the acquisition price of the asset or, in the case
of a new development, its total project cost, the higher the NPV and IRR.
Hospitality Industry Applications
When you fully understand the time value of money concept and have mastered the investment
analysis tools, you are ready to apply your new skills to real-world situations. Your skills, for
example, can help you negotiate debt and equity agreements and structure new business ven-
Debt and Equity Negotiations
Your new investment analysis skills will assist you in successfully negotiating a loan agreement
and answering questions like:
1. What is the maximum amount of loan I can afford based on my cash flow projections and loan terms
offered by the bank?
2. What is the maximum interest rate I can afford to pay based on the amount of loan I need and the
amortization rate offered by the bank?
3. How much will my annual debt service payment be based on the amount of the loan, interest rate,
and amortization rate being offered by the bank?
4. What amortization rate do I need to ask for based on the amount of loan I need and the interest rate
These skills can also assist you during your equity negotiations with a potential investor and
help you determine:
1. How much equity you can raise based on your cash flow projections and your investor’s IRR hurdle
2. What your equity investor’s IRR would be based on the percentage of ownership you are planning to
offer him, how much he is investing, and the cash flow you are projecting.
3. Working backward, the minimum percentage ownership you need to offer your equity investor to meet,
but not exceed, his IRR hurdle rate.
In addition to helping you answer these questions, you can also use these skills to prepare
loan amortization schedules, estimate the market value of your business, make lease versus
purchase decisions, and analyze multiple investment opportunities to determine the most favor-
THE INVESTMENT PACKAGE
When additional capital is required to finance a renovation or expansion of the business
where you are employed, or finance a new start-up business venture, or finance the
acquisition of an existing hospitality asset, or finance the development of a new restau-
rant or hotel, the first, and perhaps most important, step in gaining funding approval is a pro-
fessional investment package.