A motel has 30 rooms and expects 70% occupancy next year. The owners’

investment is presently $520,000, and they expect a 12% after-tax annual return on their investment. The motel is in a 24% tax bracket. The motel is carrying two mortgages: the first mortgage in the amount of

$359,000 at a 10% interest rate and the second mortgage in the amount of $140,000 at a 14% interest rate. Present book value of the building is

$632,000, and depreciation rate is 5%. Present combined book value of furniture and equipment is $117,000, and the combined depreciation rate is 20%. Indirect costs are $44,800 and direct costs are $59,300. The motel also receives an additional $12,000 a year leasing out its restaurant.

a. Calculate the motel’s required average room rate to cover all expenses and provide the owners with their desired return on investment.

b. Calculate the average single and double room rates, assuming a 60%

double occupancy and a $12 difference between singles and doubles.

LO1