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Cost groups

There are three major cost groups visible in the operating review after each year:

Fixed depreciation costs of existing assets

There is a number of depreciation costs of existing assets, set at € 525,187 fixed costs which you can find in the operating review and which you cannot influence. This part of the fixed costs is called depreciation costs of existing assets. You do not have to bother about this amount, though it is around 34.64% of your total costs, as you have a rather big asset. As these costs are fixed they are not influenced by the occupancy rate nor by decisions in the near future and so will stay the same all over the years.

Example of all costs data in the last available year 0, and four consecutive examples years.

With a mouse-over in column A you will get additional information in the original example file.

New investments

However, if you do new investments, you will get a cost group Depreciation costs of new investments on your operating review. In your explanations, you should calculate how you want to do this.
Looking at the market and the cost structure, a maximum investment of € 900,000 per year is advised by the accountant of the hotel. Of course, here needs to be an exact plan on what to use this money for. There is no worry about financing these kinds of investments: liquidity to finance an investment of € 900,000 per year is no problem.

Let's have a look at an investment of € 900,000 per year. Presume the new investments would be linearly depreciated in 4 years without any residual value, we would see costs as in the table underneath.

Investments and depreciation
Year Investment Additional yearly depreciationTotal depreciation costs in this year
Year 0 Not done € 0 € 0
Year 1 Max € 900,000 € 225,000 € 225,000
Year 2Max € 900,000 € 225,000 € 450,000
Year 3 Max € 900,000 € 225,000 € 675,000
Year 4 Max € 900,000 € 225,000 € 900,000
TotalMax € 3,600,000 € 2,250,000

But you can also choose for different investment plan. Though, in the game we always assume that all investments get equally/linearly depreciated over a period of four years without any residual value. Another presumption: all investments immediately take effect from January first in the applicable year.

Investments and depreciation
Year Investment Additional yearly depreciationTotal depreciation costs in this year
Year 0 Not done € 0 € 0
Year 1 € 100,000 € 25,000 € 25,000
Year 2 none 0 € 25,000
Year 3 € 200,000 € 50,000 € 75.000
Year 4 € 900,000 € 225,000 € 300,000
Total€ 1.200,000 € 425,000

How big should the investment be?

As stated, the hotel is getting outdated and does have the liquidity to invest. First of all, you have to have a clear plan: what do you exactly want to do? Does this fit in with your strategy? Secondly, realize that investments bring costs (the depreciation as explained above), so will the revenues compensate the costs and will, in the end, the profit go up?
But you do want to renovate the sauna, what does this cost? Well, check the internet, or look at similar cases. An educated guess is required, so estimate the costs yourself, based on any comparable prices you have found. Try to be realistic, but as in reality 'how much does it cost' depend on so many things and is not easy to answer.
The excellent Hotel cost estimating guide 2020 of JN + A and HVS design gives you information on the cost of upgrading elements in the hotel. Check this guide to get a grip on costs of new investments. Feel free to use another guide, if that is more appropriate for your hotel. Do not get lost in too many details: rather thinks in hundreds and in thousands of euro's.
Or, use horwathhtl to get an idea.

Costs and investments

The website what does it cost to build a hotel gives some outlines on the total of investments building a new hotel. Renovation costs this website gives some insights. Also, check the page rooms, with some links to websites that give an indication of costs. Looking at KPI's and ratio's in general, check this site.
Of course, any situation is different, any time frame (think of the Covid period), the owners ship, the state (quality) of the premises etc.

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