Question

In: Accounting

The Cody Hotel, a proposed 50-room hotel (rooms-only lodging facility), planned to build in mid-Michigan. The...

The Cody Hotel, a proposed 50-room hotel (rooms-only lodging facility), planned to build in mid-Michigan. The owner is concerned about the average daily room rate (ADR), construction costs, borrowing costs, and their impact on profits. He provides you with the following information:

Determine the required ADR to achieve the owner's goal of earning an ROI of 15%. (20 points)

Investment	$800,000
Debt	$1,500,000
ROI	20%
Interest rate	8%
Income tax rate	20%
Property taxes	$100,000
Fire insurances	$30,000
Depreciation	$200,000
Undistributed operating expenses (fixed)	$200,000
Undistributed operating expenses (Variable)	5%	of total room revenue
Management fee	5%	of total room revenue
Rooms department expenses (fixed)	$20,000
Rooms department expenses (Variable)	15%	of total room revenue
Expected paid occupancy	80%

Expert Solution

Average Daily Room Rates:

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To achieve the desired Return on Investment (ROI) of 15%, We need to determine the Desired Value of investment.

Desired ROI = (Desired Value of Investment - Cost of Investment) / Cost of Investment

15% = (Desired Value of Investment - $800,000) / $800,000

Desired Value of Investment = $920,000

Desired Net Income to be achived = Desired Value of Investment - Actual Investment

= $920,000 - $800,000

= $120,000

Let's assume the average daily room rate (ADR) to be "R" and determine it's value from the following details:

Let's solve this equation to derive ADR:

Desired Net Income = 8760R - $536,000

$120,000 = 8760R - $536,000

R = $75 per room per day (Rounded off)

Average daily room rate (ADR) = $75

ekkarill92 answered 1 year ago

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