Problem 12 The proposed Harris Place (a fifty-room, rooms-only lodging facility) is to be built in mid- Michigan. Jeremy Harris, the owner, is concerned about the average daily room rate (ADR), construction costs, borrowing costs, and their impact on profits. He provides you with the following information: 1. Proposed costs of the lodging facility: Land $400,000 Building $2,000,000 Equipment $1,000,000 2. Financing: Equity (desired return on investment) (ROI = 15 percent) $1,000,000 Debt (8 percent annual interest rate) $2,400,000 3. Income tax rate: 40 percent 4. Property taxes: $120,000 per year 5. Fire insurance: $30,000 (annual premium) as o 6. Depreciation: Building: 40-year life, straight-line method, $0 salvage value Equipment: 10-year life, straight-line method, $0 salvage value 7. Undistributed operating expenses: $300,000 annually and 5 percent of total room revenue Cost Approaches to Pricing 431 8. Management fee: 5 percent of rooms revenue o The telephone department is expected to just break even. 10 Rooms department expenses equal $30,000 annually plus 15 percent of room sales. 11. Expected paid occupancy is 70 percent. no Required: Determine the required ADR to achieve Jeremy Harris's goal of earning an ROI of 15 percent. blom 12