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Marriott Corporation. ... Therefore, it would be incorrect to use a single cost of capital
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Marriott: Cost of Capital. Marriott Case Marriott Corporation, an American firm,
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Marriott Cost Of Capital. QUESTION 1 ? Why does Marriott Corp need to set
up new hurdle rates for its businesses? The need to set ...
Marriott Case. QUESTION 1 Are the four components of Marriott´s financial
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Marriott. ... Investment projects at Marriott were selected by discounting the appropriate
cash flows by the appropriate hurdle rate for each division. ...
Submitted by marriott03 on July 29, 2008
Category: Business
Words: 1382 | Pages: 6
Views: 40
Popularity Rank: 114,037
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In April l988, Dan Cohrs, vice president of project finance at the Marriott Corporation was preparing his annual recommendations for the hurdle rates at each of the firm¡¯s three divisions. Investment projects at Marriott were selected by discounting the appropriate cash flows by the appropriate hurdle rate for each division.
In 1987,Marriott's sales grew by 24% and its return on equity (ROE)Stood at 22% .Sales and earnings per share had doubled over the previous 4 years, and the operating strategy was aimed at continuing this trend. Marriott¡¯s 1987 annual report stated:
We intend to remain a premier growth company-This means aggressively developing appropriate opportunities within our chosen lines of business¡ªlodging£¬contract services, and related businesses. In each of these areas, our goal is to be the preferred employer-the preferred provider, and the most profitable company.
Cohrs recognized that the divisional hurdle rates at Marriott would have a significant impact on the firm's financial and operating strategies. As a rule of thumb, increasing the hurdle rate by 1%(for example, from 12% t0 12.12%) decreased the present value of project inflows by l%. Because costs remained roughly fixed, these changes in the value of inflows translated into changes in the net present value of projects. Figure A shows the substantial impact of hurdle rates on the anticipated net present value of projects. If hurdle rates increased, Marriott's growth would be reduce, as once profitable projects would no longer meet the hurdle rates. Conversely, if hurdle rates decreased, Marriott's growth would accelerate.
Marriott also considered using the hurdle rates to determine incentive compensation. Annual incentive compensation constituted a significant portion of total compensation, ranging from 30% to 50%of base pay. Criteria for bonus awards depended on specific job responsibi1ities but often included the earnings level, the ability of...
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