A Case Study: Airbnb in Hobart

Denise, an Australian resident, is a self-funded retiree from Sydney, who is planning, this year, on moving to Hobart

and purchasing a home. This will be the first home she had ever purchased. She has been looking at three-bedroom,

two-bathroom properties with parking for three cars, and a reasonably sized outdoor entertaining area. Her plan is to

live in the property, while letting two of the bedrooms as Airbnb, for up to 4 guests. Currently, she has $700,000 in her

account with the Commonwealth Bank. As she has an income stream from her investments of $4,000 per fortnight, she

is prepared to put up to $450,000 of her savings (but is somewhat flexible with this figure) towards the purchase of the

property, making up the short-fall with a bank-loan. The Commonwealth Bank has already pre-approved her for a home

loan of up to $350,000. However, of course, she would like to take on the lowest debt possible, while making the

highest possible profit from the Airbnb.

Denise has now approached you, a highly capable Hobart team of management and cost accountants, with an excellent

professional reputation, and extensive knowledge of local council regulations. She asks you to research the financial

viability of the proposed project and has provided you with two options:

OPTION A:

An almost brand-new, high-end property, of 260 m

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, in Sandy Bay, on the market for $750,000, including

all furnishings and fittings. It meets all of Denise's criteria, has magnificent views over the Casino, and is in close

proximity to the

central business district (CBD), while having the added advantage of the two guest bedrooms with

ensuite bathrooms, a second lounge and kitchenette being located on the ground floor, thereby affording privacy to both

herself and her guests. It also has 15 solar panels,

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providing 4,950 W of power, uses energy-efficient LED lights,

providing a $380 saving on the normal quarterly electricity bill, of $900, and has a 3000 litre rain-water tank, for

flushing toilets and watering the garden. While the outdoor area is big enough for entertaining guests, there is no room

for a vegetable garden. This property is already operating as an Airbnb, bringing in $250, per room, per night, with a

pre-Covid occupancy rate of 99%. The annual council rates are $2,500, and insurance to cover the property, including

lability insurance for the Airbnb guests, and all fixtures and fittings is $1,800 per annum.

OPTION B

: A spacious, 200 m

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, older property in Berriedale, priced at $450,000, with a lovely outlook over the river,

and in close proximity to the popular MONA (art gallery). It meets all of Denise's basic criteria, although all three

bedrooms are located on the one level, and the property is in need of a total renovation, to make it fit for purpose.

Denise has received an estimate of approximately $150,000 for the renovation work, with an additional $40,000,

approximately, for painting, decorating, furnishing, and landscaping, to create a dedicated outdoor entertainment area.

This property has not been used as an Airbnb, but similar Airbnbs in the area earn up to $200, per room, per night. The

annual council rates are $1,200, and the insurance to cover the property, including liability insurance for the Airbnb

guests, and all fixtures and fittings, is $1,000 per annum. The quarterly power bill is currently $450. Denise wants to

change to energy-efficient LED lighting, at a cost of $80. This should save her up to $180 on her quarterly power bill.

She has also obtained a quote for $6000, for installing solar panels (4,950 W), which will lower her quarterly bill by a

further $300, and another for $950, for a 3000 litre rain-water tank for the toilets and watering the garden. The property

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5kW system

BFA612

: MANAGEMENT AND COST ACCOUNTING Semester 2, 2020

has a large back garden which is already set up for raising chickens and growing vegetables. There are also a dozen

different fruit trees. Denise estimates that for an annual outlay of $200 for feed and fertilisers, she could be self-

sufficient in eggs, fruit and vegetables.

Required

a)

You are required as a group to provide estimates/answers, for each option, for the following questions

using an excel file

(

Reference all material taken from other sources):

8.

Calculate the competitive price that Denise should consider.

9.

Calculate the annual profit, using the variable costing system.

10.

Calculate the breakeven point for the project?

11.

Calculate the investment Payback period, NPV, and IRR