Question

Compute the anticipated room rate using the Rule-of Thumb, or Building Cost rate.

(Note: More information may be GIVEN than is needed.)

GIVEN:	Number of rooms	800
	Average Occupancy Percentage first two years	60%
	Cost of erecting the building	$64,500,000
	Cost of acquiring the land	$ 8,000,000
	Legal costs to incorporate	$        500,000
	Upfront costs to lease furniture and TV’s	$       100,000
	Landscaping costs	$ 1,250,000
	Cost of tearing down the old structure	$       750,000

Answer 1

Please see the below table. It has been assumed that hotel/motel wants to cover the Capital cost in 3 years (Expected Pay-back period) and all calculations are based on this assumption.

Sr. #	Particular		Unit
A	Number of Rooms	800	Number
B	Average Occupancy Percentage first two years	60%	Percentage
C	Cost of erecting the Building	64,500,000	Dollar
D	Cost of acquiring the building	8,000,000	Dollar
E	Legal costs to incorporate	500,000	Dollar
F	Upfront costs to lease furniture and TV	100,000	Dollar
G	Landscaping costs	1,250,000	Dollar
H	Cost of tearing down the old structure	750,000	Dollar
I	Total Capital Cost (Sum of A to H)	75,100,000	Dollar
	Room rent considering Return on investment in 3 years
J	Burden of Total capital cost per year (I/3)	25,033,333	Dollar
K	Estimated running cost per year (15% of Capital Cost) (J* 15% )	3,755,000	Dollar
L	Total Cost (Burden + Running) (J+K)	28,788,333	Dollar
M	Misc. Cost (7% of Total cost) (L*0.07)	2,015,183	Dollar
N	Overall Cost (L+M)	30,803,517	Dollar
O	Number of Rooms	800	Number
P	One room rate for year (N/O) - WITHOUT PROFIR MARGINE	38,504	Dollar
Q	Composition of 40% low occupancy for two years (P*1.4)	53,906	Dollar
R	Profit Margined with tax deduction (5%) (Q*1.05)	56,601	Dollar
S	Assumed Days per years to be occupied	200	Days
T	Per day room rate (R/S)	283	Dollar