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A proposed budget inn of 150 guestrooms is scheduled to open. The occupancy is expected to be 70%. The owner seeks your advice on pricing.

A proposed budget inn of 150 guestrooms is scheduled to open. The occupancy is expected to be 70%. The owner seeks your advice on pricing. Although he knows that he will modify your recommendation based on revenue management results, he desires a minimum target room rate. Determine the required ADR (Average Daily Rate) from the following information.

Owner investment = $2,000,000

Desired ROI = 20%

Tax rate = 20%

Funds borrowed = $3,000,000

Interest rate = 12% annual

Forecasted annual costs

Fixed charges other than interest = $600,000

Management fees = 5% of room sales

Room department expenses = 25% of room sales.

Undistributed operating expenses = $200,000 + 5% of room sales

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