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Company Information The company's current marginal tax rate is 40% which is expected to remain constant for the foreseeable future. A typical newer motel has

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Company Information

  • The company's current marginal tax rate is 40% which is expected to remain constant for the foreseeable future.
  • A typical newer motel has 50 rooms that rent for an average of $70 per night. The occupancy rate, again on newer properties, averages 75%. But historically, new motels have had 1st and 2nd year occupancy rates that were about 1/2 and 2/3 of the ultimate occupancy rates, respectively.
  • Some of the annual costs directly attributable to individual motels in this class at 2010 prices include:

-Labor, utilities, repairs & maintenance: $2,000 per room plus 15% of gross revenues

-Property taxes, insurance: $80,000 per motel + $100 per room.

  • Room rentals are expected to increase by 2% per year due to inflation.
  • Property taxes & insurance are expected to increase by 3% per year.
  • $2,000 fixed costs per room for labor, utilities, repairs & maintenance are expected to increase by 2% per year.
  • The company depreciates all equipment using the straight line method both for tax and book purposes, assuming zero salvage value and using the following lives:
  • Buildings 40 years

Equipment and furnishings 10 years

  • The company uses a 10 year planning horizon for all major hotel improvements. The company assumes zero salvage value to compute depreciation. However, historically, land, buildings and equipment salvage values after 10 year operation, as a percent of original cost, have averaged:

Land 120%

Buildings 60%

Equipment and furnishings 20%

  • The company may or may not sell the properties at the end of the 10 years. However, all properties are subject to a review every ten years to determine whether they should be kept or sold.

Expected capital expenditures are as follows:

Land $300,000

Building 3,000,000

Furnishings & equipment 400,000

Construction and startup typically take a year (total capital expenditures will occur at the end of the first year), and operation begins in the second yearfor 10 years after a decision to build is made. The cost of capital is 8%.

Notes:

  • Land is not depreciable.
  • Cash inflows will start from Year 2 to Year 11.
  • Assume inflation effect on prices and costs will begin after Year 2.
  • Evaluate just one motel (if one motel is profitable, total investment would be good).
ROOMS 50 AVG NIGHTLY RENT (1ST YR) 70.00 OCCUPANCY RATE 1ST YEAR 0.375 2ND YEAR 0.500 LONG TERM 0.750 OPERATING COSTS FIXED COST VARIABLE COST % ROOM RENT ROOM 2,000.00 PROPERTY LABOR-UTILITY-MAINT PROP TAXES,INS 0.15 80,000.00 100.00 INVESTMENT INFO VALUE IN 10 YEARS COST 300,000 3,000,000 400,000 LIFE LAND 1.20 BUILDING 40 0.60 FURNISHINGS AND EQUIPMENT 10 0.20 OTHER INFO COST OF CAPITAL 0.08 TAX RATE 0.40 EXPECTED CHANGE IN PRICES (ANNUAL) Tax, Ins 0.03 Others 0.02 YEAR 0 2 4 5 6 7 8 9 10 11 INVESTMENT COSTS (3,300,000) (400,000) LAND & BLDG EQUIPMENT OPERATIONS REVENUES 0.750 0.750 OCCUPANCY 0.375 0.500 0.750 0.750 0.750 0.750 0.750 0.750 NIGHTLY RENT 70.00 REVENUES COSTS AND EXPENSES LABOR,UTILITIES,MAINT PROP TAXES,INS DEPRECIATION BUILDINGS FURN & EQUIP EBIT OPERATING INCOME TAX EAT ADD BACK DEP'N SALVAGE VALUE IN YR 11 LAND AND BLDG EQUIPMENT TAX ON SALVAGE VALUE LAND & BLDG EQUIPMENT 0 (3,700,000) CASH FLOWS NPV

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