Question

A motel has 30 rooms and expects 70% occupancy next year. • The owners’ investment is 520,000, and they expect a 12% after tax return on their investment.(Net Income) • The income tax rate is 24%. • The motel has two mortgages: the first in the amount of $259,000 at a 10% interest rate and the second of $240,000 at a 14% interest rate. • Present value of the building is $432,000 and the depreciation rate is 5%. • The equipment has a value of $117,000 and a depreciation rate of 20%. • Other fixed costs are $95,000. . • Variable Costs are 30% a) What sales revenue must be achieved to provide the desired net income after tax? As the occupancy rate is expected to be 60%, what would the required average room rate be?

Answer 1

Part (a)
Average no. of rooms occupied	30*70%	=	21
owners investment			520,000
Required Return(after tax)	12%
Income tax rate	24%
Required Return(before tax)
12*100/76(100-24)	15.79%
Required Return(In value)
520000*15.79/100			82,105.00
Expenses:
Interest on mortgage 1	259000*10%		25900
Interest on mortgage 2	240000*14%		33600
Depreciation on Building	432000*5%		21600
Depreciation on Equipment	117000*20%		23400
other fixed cost			95000			281,605.00
Total expenses other than VC			199500
Variable cost				0.3		402,292.86
(It is not given that variable cost is 30% of sales or not, so we are going to assume that it is 30% of sales)
Now let the sales revenue be X, so the variable cost will be 0.30X
Now total expenses	=	199500 + 0.30X
Sales = Total expenses + Required Return
X = 199500 + 0.30 X + 82105
Solving above equation the Sales revenue would be $402,293
Part (b)
Sales Revenue	$402,293
Expected occupancy rate	60%
No. of rooms	30
Occupancy @ 60%	18
Rent per Room	$22,349.61
Note: The question has specified that the expected occupancy is 60%, that is why we used the calculation above of sales revenue and solved accordingly