Question

You are considering leasing a hotel for 5 years. The hotel lease will cost you $8 million dollars up front and yearly maintenance and full-time staff is estimated at $1 million per year. There are additional part-time staff but they are dependent on the number of rooms that are rented. Rooms rent for $200 per night and the marginal cost of providing a night’s stay is $20. The hotel has 100 rooms and you expect an average occupancy rate of 70%. Your opportunity cost of capital is 10%. What is your payback period? What is your NPV?

Answer 1

Here,

Initial Cost = $8 million = $8,000,000

Yearly Maintainance Cost = $1 million = $1,000,000

Room Rent Per night = $200

Marginal Cost of room rent per night = $20

Hence net room revenue per night = $200 - $20 = $180

number of rooms = 100

Occupancy = 70%

So Net rooms revenue per year = $180 * 70 *365 = $4,599,000

Yearly Net Revenue = $4,599,000 - $1,000,000 = $3,599,000

Hence payback period = $8000000/$3599000 = 2.22 years

Now discount rate = 10%

Hence NPV =-8000000 + 3599000/(1+.1) + 3599000/((1+.1)^(2)) + 3599000/((1+.1)^(3)) + 3599000/((1+.1)^(4)) + 3599000/((1+.1)^(5))

NPV = $5643042