Azure Lodging, Inc.: A Case Study on Capital Budgeting with Capital Rationing in a Service Industry Context

This case illustrates capital budgeting in a service industry context. Three features should make this case attractive to instructors. First, the firm's rationing of capital means that students must select one investment among competing investment alternatives. Second, the project involves renovation of an existing hotel. Most cases consider a business expansion where analysis involves estimation of a single series of cash flows to generate net present value (i.e., future cash flows or not). In this case, students model cash flows if the project is accepted, comparing those cash flows to a model of cash flows if the hotel continues without renovation. Third, we introduce Monte Carlo analysis, an advanced technique for assessing uncertainty. The extensive data students use in this case is from an actual hotel chain's project database. The case has been used in undergraduate and graduate managerial accounting classes.