Question

Lou's investment ($)           $7,890,000
Lou's desired ROI (Net income)           20%
Lou's marginal tax rate           30%
Funds borrowed           $11,835,000
Interest rate           12%

Forecasted annual costs:                      
Depreciation, property taxes and insurance           $3,156,000           
Management fees           5%   of room sales      
Rooms department expenses           25%   of room sales      
Undistributed operating expenses           $1,262,400           

Assume the Bruno has 150 guestrooms, and it expects to have an occupancy rate of 70%. Also, assume a 365-day year in your calculations.

What should be the ADR so that the motel can make the sales revenue found in question 1?                      

Bruno's has both single and double rooms. Assume that 80 percent of rooms sold are double rooms, and they sell at $20 more than the price of a single room. What is the average selling price of a double?                      

Answer 1

Part 1

Lou's investment ($)	$7,890,000
Multiply: Lou's desired ROI (Net income)	20%
Net income	$1,578,000
Add: Income tax expense (1578000/(100%-30%))*30%)	$                   676,286
Income before taxes	$               2,254,286
Add: Interest expense (11835000*12%)	$               1,420,200
Income before interest and taxes	$               3,674,486
Room-Days (150*70%*365)	38,325
Now assume the ADR (Daily Sales per room) is y.
Therefore, annual room sales will be 38325y.
Depreciation, property taxes and insurance	$               3,156,000
Undistributed operating expenses	$               1,262,400
Management fees and Rooms department expenses (5%+25%=30%) (38325y * 30%)	11497.5y
Total operating expenses	4418400 + 11497.5y
Income before interest and taxes (EBIT)	$               3,674,486
Total operating expenses (Operating expenses)	4418400 + 11497.5y
Annual Room Sales = EBIT + Operating expenses
38325y = 3674486 + 4418400+11497.5y
38325y - 11497.5y = 3674486 + 4418400
26827.5y = 8092886
y = 8092886 / 26827.5
y = 8092886 / 26827.5 =	$                     301.66
ADR (Daily Sales per Room)	$                     301.66

Part 2

Room-days for
Double rooms (38325*80%)	30,660
Single room (38325-30660)	7,665
Now assume the ADR (Daily Sales per room) for double rooms is y.
Therefore, ADR for single room will be = y-20
Double Rooms (30660 * y)	30660y
Single Room (7665 * (y-20))	7665y - 153300
Total Annual sales (30660y + 7765y-153300)	38325y - 153300
Depreciation, property taxes and insurance	$         3,156,000
Undistributed operating expenses	$         1,262,400
Management fees and Rooms department expenses (5%+25%=30%) ((38325y-153300) * 30%)	11497.5y - 45990
Total operating expenses	4372410 + 11497.5y
Income before interest and taxes (EBIT)	$         3,674,486
Total operating expenses (Operating expenses)	4372410 + 11497.5y
Annual Room Sales = EBIT + Operating expenses
38325y-153300 = 3674486 + 4372410 +11497.5y
38325y-11497.5y = 3674486 + 4372410 + 153300
26827.5y = 8200196
y = 8200196/26827.5
y = 8200196/26827.5 =	$               305.66
ADR (Daily Sales per Room) for double room	$               305.66