Cost of Capital Hotel Comfort Inn

Cost of capital estimates for Comfort

Inn Hotel

The problemfacing the case protagonist is to decide

what discount rate to apply to the projected cash

flows froma new build project, what data to base his

calculations on, what variables to take into account,

how to assess risk, what premiums to apply and which

of a number of differentmodels to use tomake these

calculations. He also needs to take into account that

Costa Rica is an 'emerging economy'and how relevant

CAPMtechniques are when applied in such situations.

All organisations need sound financial economics at

the heart of their operations. The need to invest requires

managers tomake the best use of available capital and

secure the highest returns. Strategic investment

decisions cannot bemade unless the real cost of capital

is determined. CAPMis based on the proposition that

any investorwillwant a return that is equal to a risk free

investment, plus a risk premiumand that he or shewill

not invest if this is not equal to, or higher than, the

expected return: the higher the risk, the higher the rate

of return expected. CAPMcan appear complicated, but

themodel is fairly simple, thoughthedetailedcalculations

of risk, asset returns, andmarket imperfections such as

taxes, regulations and risk calculations can be complex.

I usually begin by getting participants to identify the

problembefore going on to discuss the different

concepts and tools needed to understand the factors

involved.We look at what data to use, where to obtain

it, what benchmarks andmetrics to apply and the

strengths and weaknesses of different approaches.

Comfort Inn Hotel contains threemajor proposals

evaluating the cost of capital but theremay be other

approaches to consider. Themanagers work in groups

to