Kumudini Hotels can spend Rs 25 crore renovating 200 rooms to lift the room rate by Rs 1,200. Compute the IRR of the renovation and the occupancy it would need to clear a 12% hurdle.

The renovation earns about Rs 3.68 crore a year, an IRR of about 7.7% and an NPV of about Rs -4.2 crore at 12%, so it fails the hurdle. The Rs 1,200 uplift on 140 occupied rooms for 365 nights is Rs 6.13 crore of revenue, of which 60% reaches cash. To clear 12% the project needs Rs 4.42 crore a year, which means about 84% occupancy at the new rate, or a rate of about Rs 7,443 at 70%. Neither is in the proposal.

Only the ones the renovation changes. A family deciding whether to repaint a flat before renting it out counts the extra rent the paint earns, not the whole rent. The incremental cash flowThe change in cash a project causes, counted against what would have happened without it; everything that happens either way is left out. here is the Rs 1,200 uplift times the rooms that are actually sold: 200 rooms at 70% is 140 a night, times 365, which is Rs 6.13 crore of extra revenue a year. Then the flow-through: 60% of it, Rs 3.68 crore, reaches EBITDA. The hotel's existing profit is not part of the sum.

A level Rs 3.68 crore for 10 years against Rs 25 crore up front. The annuity factor at 12% for 10 years is 5.650, so the inflows are worth Rs 20.79 crore today and the NPV is Rs -4.2 crore. The IRR is the rate at which the annuity factor equals 25 divided by 3.68, about 6.79, which happens near 7.7%. Simple payback is 6.8 years, and a 10-year project that takes nearly seven years to return its cost rarely clears a double-digit hurdle.

Work backwards. At 12% the project needs Rs 25 crore divided by the annuity factor, Rs 4.42 crore a year. Each point of occupancy at the new rate is worth Rs 5.26 lakh of cash a year, so the hurdle needs about 84% occupancy, against 70% today. Or hold occupancy and ask what rate: about Rs 7,443, an uplift of Rs 1,443 rather than Rs 1,200. The general manager can argue that renovated rooms fill better, but the case has to be made and evidenced, and 84% is a lot to ask of a business hotel.

Close with what the owner should hear. On the proposal's own numbers the renovation returns less than the cost of capital; it is not a bad hotel decision so much as an unpriced one. Three things could change the answer: evidence that renovated rooms lift occupancy, a residual value for rooms that will need less spending later, and the cost of not renovating, if a tired product loses rate anyway. That last one is the strongest argument and the one the proposal did not make.