Investments
Cost groups
There are three major cost groups indicated in the operating review after each year:
- The fixed costs stay the same for all four years, 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 new Management Team takes, after taking over. All these costs are incremental.
Fixed depreciation costs of existing assets
There is fixed costs for depreciation of existing assets, which you cannot influence, set at € 525,187; details in the operating review. 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 costs. As these costs are fixed, they are not influenced by the occupancy rate or by decisions in the near future and will stay the same for all four years.
In the example Team file, you will get additional information if you a mouseover the cells in column A. The same goes for your own hotel's Team File.
New investments
However, if you make new investments, you will occur new, additional costs that will fall in the Depreciation costs of new investments category in your operating review. The depreciation costs of these investments, is done automatically according to the rules on the investments page.
Looking at the market and the cost structure, a maximum investment of € 900,000 per year is advised by the hotel's accountant. Of course, there needs to be an exact plan on what to use this money for. There is no worry about financing these kinds of investments; the liquidity to finance an investment of € 900,000 per year is no problem.
Let's have a look at an investment of € 900,000 per year. Presuming the new investments would be linearly depreciated in 4 years without any residual value, we would see costs as in the table below.
| Investments and depreciation | |||
|---|---|---|---|
| Year | Investment | Additional yearly depreciation | Total depreciation costs in this year |
| Year 0 | 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 | € 2,250,000 |
In the Game we always assume, all investments to be equally/linearly depreciated over a period of four years, without any residual value. Another presumption; all investments immediately take effect from January 1st in the applicable year.
| Investments and depreciation | |||
|---|---|---|---|
| Year | Investment | Additional yearly depreciation | Total depreciation costs in this year |
| Year 0 | Not done | € 0 | € 0 |
| Year 1 | € 100,000 | € 25,000 | € 25,000 |
| Year 2 | none | 0 | € 25,000 |
| Year 3 | € 200,000 | € 50,000 | € 75.000 |
| Year 4 | € 900,000 | € 225,000 | € 300,000 |
| Total | € 1.200,000 | € 425,000 |
How big should the investment be?
As stated, the hotel is getting outdated and does have the liquidity to invest. First of all, you have to have a clear plan; what exactly do you want to do? Does this fit in with your strategy?
Secondly, realise that investments bring costs (the depreciation as explained above). So, will the incremental revenues compensate for the additional costs and will, profit go up in the end?
Do you want to renovate the sauna, what does this cost? Well, check the internet, or look at similar 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' depends on so many things and is not easy to answer.
The excellent Hotel cost estimating guide 2023 of JN + A and HVS design gives you information on the cost of upgrading elements in the hotel. Check this guide to get a grip on costs of new investments. Feel free to use another guide if it is more appropriate for your hotel. Do not get lost in too many details; rather think in hundreds and in thousands of euro's.
Or, use horwathhtl to get an estimate.
Costs and investments
The website what does it cost to build a hotel gives some outlines on the total investment need to build a new hotel. Looking into renovation costs, this website gives some insights. Also, check the rooms page, as it has some links to websites that give an indication of costs. To look at KPIs and ratios in general, check this site.
Of course, any situation is different, any time frame (think of the Covid period), the ownership, the state (quality) of the premises, etc.
A good starting point, for example of the cost of hotel 'equipment', would be this costguide giving an overview of costs related to renovating rooms.
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