Question

As a young entrepreneur, you are planning to open a budget hotel with a start-up capital of RM 350,000. The hotel will have single-bed rooms with an expected rate of RM 90 per room. An average room occupancy rate is about 250 per month. Annual operating expenses for which cover administration, utility and maintenance costs are about RM 80,000. The cash flows will be expected to remain unchanged for the next 10 years. It is expected that the before-tax minimum attractive rate of return (MARR) is 15% per year.

(i) What is the required average room occupancy rate per month to just breakeven?   

(ii) What is the new required average room occupancy rate per month to just breakeven, if the annual operating expenses increase by RM 7,500 each year starting from year 2? Assume other factors remain unchanged.

Answer 1

1.

Year	Cash Outflow	PVF	PV
	A	B = 1/(1+0.15)^N	C=A*B
Zero	-3,50,000	1.000	-3,50,000
1	-80,000	0.870	-69,565
2	-80,000	0.756	-60,491
3	-80,000	0.658	-52,601
4	-80,000	0.572	-45,740
5	-80,000	0.497	-39,774
6	-80,000	0.432	-34,586
7	-80,000	0.376	-30,075
8	-80,000	0.327	-26,152
9	-80,000	0.284	-22,741
10	-80,000	0.247	-19,775
		Sum of PV of Cash Outflow "C	-7,51,501

2.

		where N is number of year
Year	Cash Outflow	PVF	PV
	A (inc. by 7500)	B = 1/(1+0.15)^N	C=A*B
Zero	-3,50,000	1.000	-3,50,000
1	-80,000	0.870	-69,565
2	-87,500	0.756	-66,163
3	-95,000	0.658	-62,464
4	-1,02,500	0.572	-58,605
5	-1,10,000	0.497	-54,689
6	-1,17,500	0.432	-50,798
7	-1,25,000	0.376	-46,992
8	-1,32,500	0.327	-43,314
9	-1,40,000	0.284	-39,797
10	-1,47,500	0.247	-36,460
		Sum of PV of Cash Outflow "C	-8,78,848

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