The cost of capital reflects the cost of financing new projects/investments for a company. Currently the cost of capital for an average company in the Hotel/Gaming industry is about 6.1%. In other words, for an average company in the hotel/gaming industry about $6.10 of every $100 raised through all sources of financing goes to pay returns to bondholders, stockholders, and preferred stockholders (if there are any).
Assume that the Hotels RUs Inc. has a cost of capital equal to the industry average cost of capital (6.1%) and has the following prospective projects: Project A – Invest in distressed hotel assets from other hotel companies with an estimated rate of return of 9.8%; Project B – Investment in a New Guest Services Rollout amid a pandemic with an estimated rate of return of 8.0%; and Project C – Renovation of five currently owned properties in the Sun Belt with an estimated rate of return of 5.5%.
In less than one page, double-spaced, Discuss the accept/reject decision process of the Hotels RUS capital budgeting analyst in terms of both risk and return of these projects (A, B and C). Keep in mind that the estimated rate of return for each project is already reflecting (theoretically) all cash flow impact from that type of project. Attachment should be a WORD or PDF file. smiley