Question

The hotel chain Sueño Feliz is thinking of locating one of its hotels in Joyuda. This...

The hotel chain Sueño Feliz is thinking of locating one of its hotels in Joyuda. This will consist of 150 cabins and has an initial cost of $ 5.0 million, excluding furniture. The cost of the furniture is $ 2.0 million and it has to be replaced every 10 years, the furniture has no residual value. Indirect operating costs are estimated at $ 400,000 per year. The contribution of each cabin is $ 60.00 a day. It is estimated a useful life of the hotel for 30 years and in the end it will have a residual value of 75 percent of the investment. At what percentage of occupancy should the hotel operate to reach the break-even point if it is expected to recover the investment at a rate of 15% per year?

Homework Answers

Answer #1

Salvage value ($) = 5,000,000 x 75% = 3,750,000

Annual revenue (Assuming N cabins are booked and 365 days/year) ($) = 60 x N x 365 = 21,900N

Annual cost ($) = 400,000

Net annual benefit ($) = Revenue - Cost = 21,900N - 400,000

In break-even, Present worth of net benefit = Present worth of costs

$5,000,000 + $2,000,000 x P/F(15%, 10) + $2,000,000 x P/F(15%, 20)** = $(21,900N - 400,000) x P/A(15%, 30) + $3,750,000

$5,000,000 + $2,000,000 x (0.2472 + 0.0611) = $(21,900N - 400,000) x 6.566 + $3,750,000

$1,250,000 + $2,000,000 x 0.3083 = 143,795N - $2,626,400

$3,876,400 + $616,600 = 143,795N

143,795N = $4,493,000

N = 31.24

Occupancy percentage = 31.24 / 150 = 0.2083 = 20.83%

**It is logically assumed that the hotel will not replace furniture in its last year of operation (i.e. in year 30).

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