BUDGETS ARE MADE TO BE BROKEN

Those of you who know me and/or read my portal, you know I like math. I’ve pulled out my old textbooks and broken some chalk but I still can’t figure out how the analysts’ math works on ROI when “I” goes up by 20%. Somehow, with no scope change, projected ROI remains unchanged and is always 15%. Analysts are young these days so they may not be aware that we used to get away with 20% in the good old days. I guess with a low cost of capital, 15% sounds good enough. Oh wait, cost of capital is likely to bust the budget too.

The following chart displays the estimated cost overruns of some of the major casino projects over the last decade. We tried to adjust budgets for EBITDA enhancing scope changes to be fair. The conclusion is obvious. Casino projects rarely come in at, near, or under budget. Possible explanations are numerous: materials inflation – certainly, unfettered optimism – maybe, aggressive guidance – possibly. In any case, remember to make that adjustment in your ROI calculation the next time a new project is announced.