In April 1988, Dan Cohrs, vice president of project finance at Marriott Corporation, was preparing his annual recommendations for cap rates in each of the company's three divisions. Marriott's investment projects were selected by discounting the appropriate cash flows by the appropriate minimum rate for each division. In 1987, Marriott's sales grew 24% and its return on equity (ROE) stood at 22%. Sales and earnings per share had doubled in the previous 4 years and the operational strategy was aimed at continuing this trend. Marriott's 1987 annual report stated: We intend to remain a leading growth company. This means aggressively developing suitable opportunities within your chosen business lines: accommodation, contract services and related activities. In each of these areas, our goal is to be the employer of choice, the supplier of choice and the most profitable company. Cohrs acknowledged that Marriott's divisional cap rates would have a significant impact on the company's financial and operational strategies. As a rule of thumb, increasing the threshold rate by 1% (e.g., from 12% to 12.12%) reduced the present value of project inflows by 1%. As costs have remained more or less fixed, these changes in the value of inflows have translated into changes in the net present value of projects. Figure A shows the substantial impact of threshold rates on the expected net present value of projects. If threshold rates increased, Marriott's growth would be reduced, as once-profitable projects would no longer be able to meet threshold rates. Conversely, if cap rates fell, Marriott's growth would accelerate. Marriott has also considered using threshold rates to determine incentive compensation. Annual incentives made up a significant portion of total compensation, ranging from 30% to 50% of base pay. The criteria for awarding bonuses depended on specific job responsibilities, but often included earnings level, managers' ability to meet budgets, and overall company performance. There was some interest, however, in basing incentive compensation, in part, on a comparison of divisional return on net assets to the market-based divisional hurdle rate, making managers more sensitive to Marriott's financial strategy and capital market conditions. Corporate BackgroundMarriott The company began in 1927 with J. Willard Marriott's root beer stand. Over the next 60 years, the company grew to become one of the leading lodging and food services companies in the United States. Marriott's profits in 1987 were $223 million on revenue of $56.5 billion. See Exhibit 1 for a summary of Marriott's financial history. Marriott had three main lines of business: lodging, contract services, and restaurants. Annex 2 summarizes the data of its sector of activity.