Assignment: Dan Schaefer, Executive Director of the Petersburg, Va

Project Benefits including challenges and uncertainties

There are many capital budgeting techniques that can be used:

1. NPV: First and the most used one is the net Present value that calculates the present value of the cash flows from a project. The advantage is in the simplicity and the usefulness of this technique. This is one of the most widely used tools in the industry since it takes into account the time value of money. But the problem lies in the difficulty and many assumptions that need to be taken while predicting the cash flows in the future for the hospitality sector. Hence the approach might not yield correct results.

2. IRR: Internal rate of return calculates the rate of return of the project. There is a problem related to IRR. There is a possibility that there are no or multiple IRR for a given project.

3. Profitability Index: It calculates the profitability of a project for the company. This is similar to NPV analysis and might not be useful.

4. Breakeven analysis: In this case, the firm tries to find out the number of products or services to be sold so that there is no loss for the company.

The advantage of the breakeven analysis is the fact that the company knows the minimum quantity to sell in the market so as to breakeven and not to have a loss. This approach is also simple in nature.

The disadvantage is that the company cannot incorporate different decisions that they might have. Options cannot be incorporated in this. Also the practical situation is very complex and the model cannot incorporate everything.

For a pilot project, in most cases, the probability of success is not known. There are many approaches that can be used for the recommendation.

First of all traditional method of NPV can be used. The NPV for the project can be calculated using the cash outflows and inflows over the period of the project and then using the cost of capital. If this NPV is positive, the project can be accepted else it would be rejected....