1. (30 points) ABC Lodging, a 50-room hotel, requires $2,000,000 for construction. Equity will
be $1,000,000 and the rest will be a loan of $1,000,000 at an interest rate of 10%. The owner
desires an annual return of 16% on his equity. The income tax rate will be 36%. Depreciation
cost will be $80,000 per year. Interests and depreciation are the major fixed charges. Other fixed
costs and fixed charges will be $60,000. Undistributed operating expenses will total $500,000.
The hotel has no other operated departments. The estimated direct expenses of the room
department will be $10 per room sold. Occupancy is projected to be 70%.
Requirement:
a.
Determine the target ADR using the Hubbart Formula (rounded to two decimal points).
Desired Net Income
1,000,000 * .16 = 160,000
Pretax Income
160,000 * 1 - .36 = 102,400
Interest Exp
1,000,000 * .10 * 1 = 100,000
Income Bef Taxes
(102,400 + 100,000) = 202,400
Dep op exp
(80,000 + 60,000) = 140,000
Inc after op ex
(202,400 + 140,000) = 342,400
Und op exp
500,000
Req op Dep Inc
(342,400 + 500,000) = 842,400
Rm Dep Inc
842,400
Rm Dir Exp
(50 * .70 * 365) = 12,775 * 10 = 127,750
Rm Revenue
(842,400 + 127,750) = 970,150
Req ADR
(970,150 / 12,775) = $75.94
b.
Assuming a double occupancy of 40% and a $10 premium for a double room, what
should be the single rate and double rate (rounded to two decimal points)?
(.40 * 50 * .70) = 14