Investments
Cost groups
There are three major cost groups visible in the operating review after each year:
- the fixed costs have stayed the same during all four years, and the fixed depreciation costs are one of them.
- the variable costs depend on the occupancy rate
- the costs Management Team Decisions, will depend on the decisions the management team takes after taking over.
Fixed depreciation costs of existing assets
There is a number of depreciation costs of existing assets, set at € 525,187 fixed costs which you can find in the operating review and which you cannot influence. This part of the fixed costs is called depreciation costs of existing assets. You do not have to bother about this amount, though it is around 34.64% of your total of costs as you have a rather big asset. As these costs are fixed they are not influenced by the occupancy rate nor by decisions in the near future and so will stay the same all over the years.
With a mouse-over in column A you will get additional information in the original example file.
New investments
However, if you do new investments, you will get a cost group Depreciation costs of new investments on your operating review.
In your explanations, you should calculate how you want to do this.
Looking at the market and the cost structure, a maximum investment of € 900,000 per year is advised by the accountant of the hotel. Of course, here needs to be an exact plan on what to use this money for. There is no worry about financing these kind of investments: liquidity to finance an investment of € 900,000 per year is no problem.
Presume new investments would be linearly depreciated in 4 years without any residual value, we would see the costs as in the table underneath.
| Max. investments and depreciations | |||
|---|---|---|---|
| Year | Investment | Additional yearly depreciations | Total depreciations this year |
| History | Not done | € 0 | € 0 |
| Year 1 | Max € 900,000 | € 225,000 | € 225,000 |
| Year 2 | Max € 900,000 | € 225,000 | € 450,000 |
| Year 3 | Max € 900,000 | € 225,000 | € 675,000 |
| Year 4 | Max € 900,000 | € 225,000 | € 900,000 |
| Total | Max € 3,600,000 | € 900,000 | € 2,250,000 |
But you can also choose for total different investments like:
| Max. investments and depreciations | |||
|---|---|---|---|
| Year | Investment | Additional yearly depreciations | Total depreciations this year |
| History | Not done | € 0 | € 0 |
| Year 01 | € 100,000 | € 25,000 | € 25,000 |
| Year 02 | none | 0 | € 25,000 |
| Year 03 | € 200,000 | € 50,000 | € 75.000 |
| Year 04 | € 900,000 | € 225,000 | € 300,000 |
| Total | € 1.200,000 | € 275,000 | € 425,000 |
Remember there is a history of the hotel. You carefully have to explain the amount in your Team file.
But you fill out the depreciation each year, NOT the investment, as you are working in an operational review which is on costs, not investments! So the maximum new investments to be made are € 3,600,000 over four years, which is a high amount, looking at the past. And the only costs it will ring, for now, is the costs of depreciation. For now, we will refrain from other costs linked to investments, like interest. In your decisions you fill out the investment: you will find the corresponding depreciations on your operating review.
You can invest in any year, even in year 4. The depreciations then will take place in year 4, 5, 6 and 7. Of course the last three will not be visible in th game. But, your hotel doesn't 'stop' after year 4.
How big should the investment be?
First of all, you have to have a clear plan: what do you exactly want to do? Does this fit in with your strategy?
Secondly, realize that investments bring costs (the depreciation as explained above), so will you earn this back?
But you do want to renovate the sauna, what does this cost? Well, check the internet, look around in study material or look at cases. An educated guess is required, so estimate the costs yourself, based on any comparable prices you have found. Try to be realistic, but as in reality 'how much does it cost' depend on so many things and is not easy to answer. A good starting point is estimating hotel costs. Do not focus too much on details and looks at the depreciation costs of existing assets, set at € 525,187. So going way above this number is risky.
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