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Room Pricing and Expense Estimates

The Casa Vana Inn is a 200 room property that cost $10 million total to construct. It is financed with a $7.5 million loan at 12% interest and $2.5 million from owners. Owners want a 15% annual return on their $2.5 million investment. The hotel is estimated to sell 54,750 rooms in a year at 75% occupancy. Additional expenses are estimated at $2.125 million. To cover all costs and provide the desired return, the required average room rate is calculated to be $67.81.

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Mihir Hareet
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302 views3 pages

Room Pricing and Expense Estimates

The Casa Vana Inn is a 200 room property that cost $10 million total to construct. It is financed with a $7.5 million loan at 12% interest and $2.5 million from owners. Owners want a 15% annual return on their $2.5 million investment. The hotel is estimated to sell 54,750 rooms in a year at 75% occupancy. Additional expenses are estimated at $2.125 million. To cover all costs and provide the desired return, the required average room rate is calculated to be $67.81.

Uploaded by

Mihir Hareet
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© All Rights Reserved
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Problem: Reference : Kasavana Brooks, 5th Edition, Pg.

351
Hubbart Formula Approach, Room Pricing

The Casa Vana Inn, a 200 room property, is projected to cost


$9,900,000 inclusive of land, building, equipment, and furniture.
An additional $100,000 is needed for working capital, bringing
the total cost of construction and opening to $10,000,000. The
hotel is financed with a loan of $7,500,000 at 12% annual
interest and cash of $2,500,000 provided by the owners. The
owners desire a 15% annual return on their investment. A 75%
occupancy is estimated; thus, 54,750 rooms will be sold during
the year (200 x 0.75 x 365). The income tax rate is 40%. Additional expenses are
estimated as follows:
Property tax expenses $250,000
Insurance expenses $ 50,000
Depreciation expenses $300,000
Administrative & General expenses $300,000
Data processing expenses $120,000
Human resources expenses $ 80,000
Transportation expenses $ 40,000
Marketing expenses $200,000
Property operation & maintenance expenses $200,000
Energy & related expenses $300,000

The other operated departments income (loses) are estimated as


follows:

Food & Beverage Department $150,000


Telephone department ($50,000)
Rentals & other departments $100,000

The rooms department estimates direct operating expenses to be


$10 per occupied room.

Continued in Page 2

1
Illustration:

Item Calculation Amount


Desired Net Income: Owners’ Investment X ROI
$2500,000 X 0.15 = $375,000
Pretax Income = net income
1 – tax rate
Pretax income = $375,000
1 – 0.4
Pretax income = $625,000
Plus: Interest expense: Principal x interest rate
= interest expense
$7,500,000 X 0.12 = +900,000
Income needed before 1,525,000
Expense & taxes:
Plus: Estimated Dépréciation, ($2,50,000 + $50,000 + +600,000
Property taxes & insurance $3,00,000)

Income before fixed charges: 2,125,000


Plus: Undistributed operating ($3,00,000 + $1,20,000+ 1,240,000
expense: (Admin and General $80,000 + $40,000 + $2,00,000
Expenses + Data Processing + $ 2,00,000 + $3,00,000)
Expenses + HR Expenses +
Transportation Expenses +
Marketing Expenses + Property
Operation and maintenance
Expenses + Energy and Related
Expenses)
Required operated depart- $3,365,000
-ments income
Less: F & B department income (150,000)
Less: Rentals& other (100,000)
department income
Plus: Telephone department 50,000
loss
Departmental results……… $ (200,000)
excluding rooms.
Rooms department income 3,165,000

Plus: Rooms department direct (54,750 X $10 = $547,500) 547,500


expense
Required Rooms Revenue 3,712,500

Divide by number of rooms 54,750


sold
Required Average Room $ 67.81
Rate

2
3

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