A 25-room budget motel expects its occupancy next year to be 80%. The owners’ investment is $402,800. They want an after-tax return on their investment of 15%. Tax rate is 25%.
Interest on a long-term mortgage is 10%. Present balance outstanding is $806,400.
Depreciation rate on the building is 10% of the present book value of $700,200. Depreciation on the furnishings and equipment is at 20% of the consolidated present book value of $150,400.
Other known fixed costs total $141,800 a year.
At 80% occupancy rate the motel’s operating expenses, wages, supplies, and laundry, etc. are calculated to be $55,400 a year.
The motel has other income from vending machines of $5,210 a year.
Questions:
1. To cover all costs and produce the required net income after tax, what should the motel’s average room rate be next year?
2. If the motel operates at 30% double occupancy and has an $8 spread between its single and double rates, what will the single and double room rates be? Assume only one common room size, all with the same rates.