Problem 24

Nicole Sellers is planning to purchase a fifty-room limited-service lodging operation for $5,000,000. she believes she can borrow 60 percent of the $5,000,000 and will invest her own funds for the remainder. The remaining relevant facts are as follows:

Her desired annual ROI: 18%

Average tax rate: 35%

Annual interest rate: 6%

Annual fixed costs (other than interest): $500,000

Variable costs: 40%

Assume an average paid occupancy of 70%.

Required:

1. Usingthe bottom-up pricing approach, what is the average room rate?
2. Assume an average double occupancy percentage of 60 percent and a price differential of $15 for double rooms compared to single rooms. What its he average price of a double room?

Problem 25

Brent Summers plans to purchase a proposed 100-rooms hotel fully furnished. The total cost is $8,000,000. he believes 70 percent of the cost can be financed with a loan from the Champagin National Bank at an annual interest rate of 8 percent. The projected paid occupancy is 75 percent. Brent requires a 15 percent return on his investment after the incorporated hotel pays 30 percent of its pretax income as income taxes. The estimated undistributed expenses excluding income taxes and interest expense total $800,000 annually. The estimated direct expenses of the rooms department are $15 for each room sold and $60,000 fixed for the year. Consider a year to have 365 days. Assume annual miscellaneous income of $10,000.

Required:

1. Determine the average price per room using the Hubbart Formula.
2. If double rooms are sold at a premium of 20 percent over single, what are the prices of single and double rooms? Assume a 70 percent double occupancy rate.