Question

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?

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).