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"ickson has been approached by the franchise sales representative of a major hotel chain. The sales representative is trying to interest Jerry in building one of the franchise brand's fullservice hotels. Jerry has summarized the hotel's estimated financial projections below:

Jerry's New Hotel

Hotel construction costs

$8,000,000

Number of rooms

200

Mortgage payments

$750,000

Nonoperating expenses

$250,000

Occupancy

60%

Per room expense @ 60% occupancy

$45.00

Undistributed operating expense

$1,000,000

F&B operating income

$125,000

All other nonrooms operating income

$50,000

Target investment return

12%

Tax rate

40%

Utilizing the Hubbart room rate formula, what is the room rate required for Jerry to meet his 12% investment target?

Assume Jerry decided that due to the potentially risky nature of this venture, he required a 15% (not 12%) return on his investment. What is the room rate required for Jerry to meet this more aggressive investment target?

Assume that the occupancy rate estimated to be achieved by the franchise sales representative was 70% and this number was utilized to compute the Hubbart rate (rather than Jerry's more conservative 60%). What would the sales representative tell Jerry his ADR would have to be to achieve Jerry's 15% investment goals?

Assume instead that the F&B operating income is estimated at $75,000 per year rather than $125,000. Using the 15% desired investment return and a 70% occupancy rate, what new room rate would allow Jerry to meet his investment goals?(Spreadsheet hint: Calculate question (a) first and type the answer for ADR in the cell provided at the bottom of the spreadsheet. For items (b), (c), and (d), change only the numbers that are required in each question, and all the other numbers in the spreadsheet will change accordingly. Then, type the answers for ADR (as you go) in the cells provided at the bottom of the spreadsheet.)

Step 1.

Calculate the hotel's target beforetax net income.

Owner's investment

ROI

AfterTax Net Income

AfterTax Net Income

Tax

BeforeTax Net Income

Step 2.

Calculate estimated nonoperating expenses.

Mortgage

Other NonOperating Expenses

Total NonOperating Expenses

Step 3.

Calculate estimated undistributed operating expenses.

Undistributed Operating Expenses

Step 4.

Calculate estimated operated departments income excluding rooms.

F&B Operating Income

Other NonRooms Income

Total NonRooms Operating Income

Step 5.

Calculate the operated department income for rooms.

BeforeTax Net Income

NonOperating Expenses

Undistributed Operating Expenses

Total NonRooms Operating Income

Rooms Operated Department Income

Step 6.

Calculate the estimated rooms department revenues based on estimated occupancy.

Rooms

Days in Period

365

Occupancy %

Total Rooms

Total Rooms

Expense per Room

Total Room Expenses

Rooms Operated Department Income

Total Room Expenses

Rooms Revenue

Step 7.

Calculate the hotel's required ADR.

Rooms Revenue

Total Rooms

ADR

e.

ADR with 12% ROI

f.

ADR with 15% ROI

g.

ADR with 15% ROI and 70% Occupancy %

h.

ADR with 15% ROI and 70% Occupancy % and $75,000 F&B Operating Income

"

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