Question

Hubbart approach

The Pimlico Hotel is a 200-room hotel and it is projected to cost $15 million including land, building, equipment, and furniture and working capital. The hotel is financed with a $10 million loan at 8% interest rate. The owner’s investment in the property is $5 million. The owners desire a 16% return on investment. The hotel projects 80% occupancy rate and it will be open 365 days a year. The income tax rate is 40%. Room’s department direct expenses

are $10 per room sold.

The following are the fixed and undistributed expenses.

Depreciation expense $300,000

Amortization expense 100,000

Rent Expense 130,000

Administration and general 300,000

Marketing 200,000

Utility costs 200,000

Property Operations and Maintenance 120,000

Insurance 50,000

Property taxes 200,000

Other operated departments’ Income/losses

Food 150,000

Beverage 50,000

Telephone (50,000)

Additional information

Double occupancy 40%

Rate difference (spread) between double and single is $10.

Using the information above find the ADR and determine double rate and single rate for the Pimlico Hotel.

Answer 1

Given data
Rooms=200

Project cost =15million

Loan@8%=10million
owner's investment =5million

Owner's desired ROI =16%

Occupancy rate=80%. Ie, No of rooms occupied = 200*80%=160 rooms

Double occupancy = 200x40%=80 rooms

Computation of Room revenue

Variable expenses = 10 per room sold

Fixed expenses =1.6 million ( dep. + amor + rent + admin + marketing + utility + maint+ insurance + taxes)

Computation of ADR

fixed expenses =1,600,000

Other operated income/ (loss) = 100,000

Interest on loan = 10 million *8% =800,000
investoo's desired ROI = 15 millionx16%=2400,000

Tot of fixed expenses to be recovered = 1600,000 +(100,000)+ 2400,000=3900,000

No of rooms =160 rooms *365 days = 58,400

Revenue = x

Variable cost =10x58,400 =584,000

Contribution = x-584,000

Fined cost = 3900,000

Gross profit = x-584,000-3900,000 = x- 3316,000

Tax = 40% * (x-3316,000) = 0.4x- 1326,400

Net profit = (x-3316,000) - (0.4 x-1326,400) = 0.6x - 1989,600

However, desired profit of investors is 2400,000

: 0.6x-1989,600=2400,000 ⇒ 0.6x= 4389,600 ⇒ x= 7316,000

Therefore, room revenue should be 7316,000

rooms = 160*365= 58,400 rooms
Double occupancy = 80x365= 29,200 rooms

Let say revenue for single room per day is x

Therefore, 58,400x + 29,200 (x+10) = 7316,000

X= $80

Double occupancy = $80+ $ 10 = $90