The cost of capital in making a hotel is the minimum rate of
return expected by its investors. It is the weighted average cost of various
sources of finances used by a hotel. The capital structure may be in the form
of debt, preference capital, retained earnings and equity shares. A decision to
invest in a particular hotel project depends on the cost of capital of the
firm, and a fixed minimum rate of return expected on its investments, so as to
maintain the market value of its share.
Building a hotel is a unique project, in contrast to the
manufacturing sector where cost components are highly standardised, precisely
prescribed, or directly derived from the production capacity proposed. All the
cost components, in a hotel project, are left to the choice of the promoters.
The variations while making a hotel are on account of the differences in land
costs, hotel concepts, services and facilities provided and so on.
The building cost depends on the architect's plan, which is
in turn, the replica of the promoter's concept of the hotel with creative ideas
involved. The location has a direct bearing on the cost of construction,
because if the materials have to be sourced from distant places, transportation
costs will be higher. The cost of interior design too is thus dependent on the
layout and the concept involved. Yet another factor to be considered is the FSI
(Floor space index) regulation as applicable to the location.
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